Kingfisher shares slide on “guarded” outlook

It’s been more than two years since Kingfisher (KGF) embarked on its epic five-year journey to deliver “£500 million of sustainable profit uplift”.

According to chief executive Véronique Laury in today’s annual results, the ONE Kingfisher transformation plan continues to make good progress after the B&Q and Screwfix owner met key strategic milestones for the second year in a row. She says that changes are now visible across stores and online.

But there’s an awful long way to go, particularly if you happen to be a shareholder. In fact, the blue-chip company’s share price remains below where it was prior to the start of the five-year plan, with today’s 8% drop compounding the disappointment.

Unfortunately, the overhaul coincides with unhelpful macroeconomic conditions, with Kingfisher today describing the UK outlook as “uncertain”, with France “encouraging yet volatile”. The market in Poland is seen as “supportive”.

These conditions contributed to underlying sales coming in broadly flat at £11.6 billion in the year to January 31, leading to an 8% fall in adjusted pre-tax profits to £683 million and an 11% drop in EPS to 21.8p.

In addition, 2018/19 will be “another big year” for the transformation plan, leading to the potential for more ongoing business disruption.

The five-year, ONE Kingfisher plan aims to unify the products on offer across Europe, as well as improve infrastructure and processes in order to become a simpler, more agile operation. The £500 million of sustainable annual profit uplift by year five is over and above ‘business as usual’.

So far, over a third of ranges have been unified and the company is into the final year of rolling out a new IT platform. Operational efficiency initiatives have initially focused on goods not for resale.

The transformation is supported by a plan to return £600 million of surplus capital to shareholders between 2016/17 and the current financial year. During 2017/18, £260 million was returned to shareholders via a share buyback in addition to the £200 million in 2016/17.

An increase of 4% in the full-year dividend to 10.8p is a sign of management confidence, while Kingfisher says it is comfortable with medium term dividend cover in the range of 2.0 to 2.5 times based on adjusted EPS.

Even though the shares are up 12.5% over the past six months, the performance across the last year has been more subdued, with Kingfisher having lost 3%, as compared to a 4% dip for the wider FTSE 100 (UKX).

Source: interactive investor             Past performance is not a guide to future performance

Richard Hunter, head of markets at interactive investor, said: “There is certainly progress being made, but in the interim the market consensus of the shares as a buy may be subject to some downward pressure.”

He noted that the projected dividend yield of 3.4% remains light of what investors should reasonably be expected to receive while the business turns around, while the outlook as provided by the company is “extremely guarded”.

Mark Photiades, director of general retail research at Cantor Fitzgerald Europe, kept his hold rating on Kingfisher following today’s results. His price target of 325p is based on a 2018 PE multiple of 11.8x.

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