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BUY: Kingfisher (KGF)
While robust demand led to some impressive headline figures, the short-term outlook looks more uncertain, writes Christopher Akers.
Kingfisher soared to more than £1bn in pre-tax profits for the year as robust demand for home improvement items fed through to the results and progress was made on the ecommerce side of the equation. But the retailer, which owns B&Q and Screwfix, expects a fall in profits this year and the confirmation of relatively poor post-period trading contributed to a fall in the share price on results day.
The UK and Ireland market was the top performer, with the margin climbing by a third to 12.2 per cent. B&Q sales were up by 13 per cent to £4.2bn, as the TradePoint banner was relaunched and grew by a fifth — outperforming the core business. Screwfix revenue jumped by 14 per cent to £2.3bn on the back of 70 new store openings, with the aim to hit 1,000 stores in the medium term.
International revenues are dominated by France, where the margin was up by 70 basis points and sales grew by more than 4 per cent to £4.5bn.
Almost a fifth of all sales were made through online channels. This was in line with the previous year, but there are signs of greater future promise. Online revenue grew by 5 per cent, and by 171 per cent against the two-year comparative. A new B&Q ecommerce marketplace was launched this month, with investment from the £25mn earmarked for new projects, and will offer an additional 100,000 products to the current online offering.
Chief executive Thierry Garnier said: “We continue to leverage our store assets and group technology to drive forward our ecommerce proposition.”
Looking ahead, management confirmed that they expect adjusted pre-tax profits for this year to be in line with analyst forecasts of around £769mn. A significant drop from the £949mn in the 2021 results, in other words. At a time of rising prices and hits to the spending power of consumers, the outlook is difficult. Like-for-like sales for the first quarter of this year were down by 8 per cent, albeit up by 16 per cent on a two-year basis.
Numis analysts have the shares trading on about 10 times forward earnings, and said that “our concerns that this remains an inflated earnings base continue to weigh on our enthusiasm”. But we still think the long-term case remains sound. While there may be short-term volatility, investors can be soothed by the continuing share buyback programme — the final £75mn of a £300mn package will be completed by May.
HOLD: Saga (SAGA)
The over-50s specialist has not shaken off legacy issues linked to the pandemic, writes Mark Robinson.
Given Saga’s business mix, few companies could have been worse placed to ride out the pandemic. Indeed, one of the first areas to feel the negative impact of Covid-19 was the cruise industry.
By now, the market probably expects that any positive news on the group will come in increments, so the shares duly clicked into reverse on results day, despite predictable assurances over turnround strategies and debt reduction.
Saga registered a double-digit increase in revenue even though net premiums were broadly in line with the full-year 2021 comparator. However, it was accompanied by an 8.3 percentage point reduction in the gross margin, a somewhat crude, though arguably indicative, measure of performance. The statutory loss did narrow, though this was entirely due to £65mn in impairments taken on in the prior year.
Financial comparisons probably aren’t as meaningful as you might expect given that various parts of the business are still coping with the legacy effects of the pandemic. The group had to contend with higher marketing costs as business groaned back into life, along with increased motor insurance claims as traffic volumes returned to more normal levels. It would be reasonable to assume that underwriting general insurance policies must be a more challenging process given that many end-markets remain in a state of flux, though the number of policies in force increased for the first time in almost a decade, while the segment generated underlying profits of £54.1mn, albeit with £42.1mn in previous year reserve releases.
Attention is likely to focus on the performance of the cruise/travel business through the remainder of this year. The tour operations business is targeting a return to pre-pandemic contribution levels from 2023/24, helped along by a planned reduction in the cost base through restructuring initiatives. The recent travails of P&O Ferries may have spooked some shareholders, though any comparisons would be somewhat spurious. The fact remains, however, that we can’t be sure how quickly load factors for Saga’s liners are likely to recover to pre-pandemic levels, if at all. It’s entirely possible that some over-50s no longer relish the prospect of living cheek-by-jowl alongside potentially virulent fellow mariners.
Management gave few specifics on near-term financial performance, and it is too early to determine if restructuring measures have made the group any more watertight, even though it recorded a 4 per cent fall in net debt. We will need to wait longer to determine whether it is dealing effectively with the legacy issues of the pandemic.
SELL: Dignity (DTY)
While the company was back in the black, a new strategy means that the short-term outlook is volatile, writes Christopher Akers.
Funeral provider Dignity returned to profit on the back of remeasurement gains on its financial assets and made progress with its strategic transformation. But the market responded gravely to management warnings on future profits, with the shares falling by over 10 per cent, and the dividend has not yet been resurrected.
Gains of £94.8mn on assets were recorded, up from £47.3mn in 2020. This, perhaps, obscured the performance of the fundamental core of the business. Push the level of gains back to the comparative’s level and Dignity would have plunged to another loss.
A major result of the company’s new strategy is a significant lowering of prices. Dignity had been specifically criticised by the Competition and Market Authority (CMA) for expensive prices as part of that body’s recent investigation into the funeral market — new obligations, including the publication of a standardised price list, had to be implemented by 16 September. The hope is that, in time, volumes will grow to compensate for the loss of a higher pricing structure and that the market share losses of recent years will reverse.
Chief executive Gary Channon said that the overhaul, “is likely to lead to lower profits in the short term as we see a full-year effect of the lower prices we have been using since September”.
Management also flagged the impact of a lower death rate on future prospects. With the Covid-19 pandemic causing a spike in excess deaths, the likely reversal of this trend could hit the company’s fortunes. The Office for National Statistics estimates that there was 664,000 deaths in Britain in 2021, up very slightly on 2020, which is high by historical metrics — annual figures hovered below the 600,000 mark in 2019 and 2018.
But none of this is to say that it is all doom and gloom for Dignity. Management are open about strategic change being a long-term project. If volumes do grow, then the outlook could look very different for the company. And it will be interesting to see what happens with plans to reform the capital structure and leverage — Channon said that “we still expect to do some form of transaction” in this area.
The shares are trading on a consensus 20 times forward earnings, far above the five-year average of 13 times. Such a premium doesn’t currently look justified, especially given the profit outlook. We stick with our recommendation for now, but will be keeping a close eye on strategic progress.
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