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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (222)  | Author's Website |

Kingfisher Trades at a Nice Valuation

The UK-based hardware store chain has been growing slowly, but trades at a nice valuation with a healthy dividend yield

Kingfisher PLC (LSE:KGF) (KGFHY) (KGFHF) is a reasonably priced, low growth stock. This British hardware store probably won’t put up great growth, but does trade at a very nice valuation.

The stock trades for 2.90 pounds ($3.92), there are 2.2 million shares and the market cap is 6.38 billion pounds. Price-earnings were 22 pence and the price-earnings ratio is 13. The dividend is 11 pence and the dividend yield is 3.8%. So far, Kingfisher’s stock looks cheap.

Sales were 11.13 billion pounds in 2013 and 11.66 billion pounds for the trailing 12 months. They’ve barely budged in the economic recovery. Earnings per share fell from 30 pence to 22 pence over that time frame. Costs rose but revenues did not. Free cash flow fell from 530 million pounds to a loss of 75 million pounds over that time frame too. You can see why investors are grouchy.

Last year, management returned 231 million pounds in dividends and 260 million pounds in share buybacks. That’s pretty good. Also, management did something I wish all companies would do: evaluate the market value of real estate. The real estate portfolio came to 3.5 billion pounds.

I will perform a simple valuation of net asset value. Cash is 230 million pounds, accounts receivables 550 million pounds and the real estate portfolio is 3.5 billion pounds. That’s 4.28 billion pounds. The liability side is listed at 3.6 billion pounds for a net asset value of 680 million pounds. If you add inventories of  2.7 billion pounds, you get an net asset value of 3.38 billion pounds, which is much less than the 6.38 billion pounds market cap.

Kingfisher has 1,280 stores throughout mainly Europe. Approximately 43% of revenues come from the U.K. and Ireland, 38% from France and 19% from other countries in Europe, but also Russia, Turkey and Romania. Its stores sell under the names: koctas, Brico Depot , castorama, B&Q and Screwfix. As you can guess, they are similar to Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW), so I don’t need to explain what a hardware store does.

A Bloomberg article blames Brexit and the fall of the British pound. This fall in the currency has lifted costs. I can see that. That article seems optimistic on the value of the pound. We shall see.

“Consumer confidence is lower, inflation is higher than wages and housing transactions are down,” Kingfisher CEO Veronique Laury stated in an earnings call.

Management has a plan to cut costs and increase its digital presence by 2021. Kingfisher plans to cut costs by 500 million pounds. Morningstar has a price estimate of $9.57 for the American Depositary Receipts and the price in the U.S. is currently $7.88.

My opinion is Kingfisher faces many of the same challenges European companies face—there is little growth. That’s not the end of the world. A 3.8% dividend return in a no-growth world isn’t terrible. I think the stock is not trading at a bad value (though we are not going to buy). Kingfisher is a good stock for the patient value investor who understands the days of earning 12% a year on your portfolio are long gone.

Disclosure: We do not own shares.

About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

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