Shareholders in Kingfisher, who are sitting on a 46 per cent loss
year-on-year, may have long suspected that the DIY retailer was
better-suited to private ownership. On the evidence of yesterday’s
turnaround plans, its new chief executive seems to agree.
The detail that Ian Cheshire added to the company’s recovery strategy
yesterday comes straight out of the private equity handbook. Capital
expenditure is being cut by 20 per cent, buying is being tightened and
working capital cost savings of £100 million are being sought. At B&Q,
Mr Cheshire wants to more than double operating margins from 3.3 per cent
last year to 7 per cent by 2012. In keeping with such tactics, Kingfisher’s
top team stands to pocket private equity-style returns if the turnaround
succeeds – roughly £16 million over four years in Mr Cheshire’s case.
None of this is especially new, particularly in retail. Kate Swann took much
the same line, to great effect, at WH Smith and, on a smaller scale, Neil
Gillis is doing something similar at Blacks Leisure. So, with such schemes
having often proved the elusive “inflection point” elsewhere, is now the
time to buy back in? The other part of yesterday’s stock exchange
announcement – that which covered first-quarter trading – suggests not.
Retail profits may have been better than expected, thanks to three
percentage points of gross margin gains at B&Q UK, but the wider
trajectory remains downwards and Mr Cheshire has become even more cautious
in recent months.
Neither do profit forecasts tell the whole tale. Consensus estimates suggest
that Kingfisher will make £370 million this year, a modest decline against
£386 million last, but that masks the extent to which the bottom line should
be boosted by currency movements – to the tune of £50 million from the
depreciation of sterling against the euro, in which Castorama and Brico
Depot report.
More important, Kingfisher remains highly operationally geared: with operating
margins this year heading for 2 per cent, declining sales have a
disproportionate effect on earnings. For the incentive scheme to pay out,
the company needs to make up to £700 million of pretax profits, which seems
a stretch given that B&Q UK should contribute only £75 million this
year.
At 135.9p, or 13 times current-year earnings, Kingfisher’s recovery has
already been priced in. That seems far too forceful, given the damage that
could yet be done by consumer indebtedness. Keep away.
Northumbrian
Northumbrian Water may have secured the goodwill of its customers – it has
pledged to raise bills by less than its regulatory allowance – but investors
may feel more ambivalent.
Over the past three months its shares have lagged behind Britain’s big four
quoted water utilities – despite a 7 per cent gain on the week. After
yesterday’s full-year results, that treatment appears harsh. Pretax profits
were up an above-forecast 15 per cent, the dividend was raised 7 per cent
and the company confirmed that it had secured funding for its capital
expenditure programme to 2011. It has also met its leakage targets and its
pension fund surplus has more than doubled on the year.
Yet investment is about relative returns and Northumbrian can suffer by
comparison with its peers. Its prospective dividend yield, the attraction of
regulated utilities, is a none-too-compelling 3.6 per cent. A £2.2 billion
debt burden means that unlike United Utilities and, it is forecast, Severn
Trent and Pennon, Northumbrian is unlikely to return capital to shareholders
before 2010, when the next five-year regulatory period begins.
The other consideration is that, alongside Pennon, Northumbrian has been seen
as a takeover candidate. Tight credit markets have taken that prop away for
now and the Ontario Teachers Pension Plan, which owns 26 per cent, appears
to be in no hurry to sell: it has a mature pension scheme whose demands
Northumbrian fits. For a well-run, pure-play water company, 335¾p, or 13
times current-year earnings, is no more than fair value. Hold.
Sportingbet
Yesterday’s third-quarter numbers provide an excellent picture of just how far
Sportingbet has come since the American internet gambling ban robbed it of
two thirds of its business. In the three months to the end of April, it made
almost as much profit as it did in the whole of last year.
Sports betting, which accounts for 63 per cent of profits, was the strongest
performer, with volumes in Europe and Australia both up by more than a
quarter. Its online casino unit also grew strongly, but poker was down quite
sharply as the loss of the biggest poker market in the world continued to
have an impact. It seems clear that, unless the US ban is reversed, poker
will continue to mark time – although as it accounts for only about 14 per
cent of its business, the downside should be subdued.
The main attraction of today’s Sportingbet is that it has learnt the lesson of
the US ban and has created a more broadly based business geographically. It
aims to have no single country generating more than 20 per cent of net
gaming revenues. The arrest of two Turkish employees last week shows the
benefits of such a policy. Although the company insists that it will not
withdraw from Turkey, it clearly cannot place too much reliance on a country
where internet gambling remains a grey area in legal terms.
Financially, Sportingbet, which at 37¼p trades at an enticing seven times next
year’s earnings, is doing all the right things, but with so many
jurisdictions retaining, at best, an equivocal attitude to internet gambling
and with the poker boom having lost its fizz, this stock is only for the
brave.
