Travis Perkins PLC (LON:TPK) said it is exploring the sale of its plumbing and heating division as part of a strategy to simplify its structure, reduce its costs and focus on more profitable businesses.
In a strategy update on Tuesday, the building materials group also said it would review options for maximising the value of its Wickes home improvement business in the medium term, which suggests a potential sale.
In the short term, it will look to improve the performance of Wickes.
"We have developed a clear plan to focus on delivering best-in-class service to our trade customers, and to simplify the group to reduce complexity, speed up decision making and reduce costs,” said chief executive John Carter.
“Our trade businesses hold strong positions in attractive markets, and these initiatives will enable us to concentrate our management time and capital in the highest returning areas.
“Our strong balance sheet and free cash flow generation, driven by growing earnings and lower capital expenditure, will underpin our commitment to drive shareholder value and a progressive dividend."
READ: Travis Perkins sales rise despite tough UK DIY market
Travis Perkins targets further cost savings
Travis Perkins aims to deliver sales growth by focusing on its contract merchanting businesses, the Toolstation trade tools unit and the general merchanting division. It plans to make improvements to the general merchanting business, overhaul its IT systems and expand the Toolstation UK and Europe businesses.
The group is targeting further annualised cost savings of £20-30mln over the next 18 months.
Free cash flow generation is expected to strengthen over the medium term, driven by improved earnings and lower capital expenditure.
Travis Perkins reiterated its medium-term target for lease adjusted debt to EBITDAR of 2.5x and will maintain a progressive dividend policy.
Uncertain market conditions
The group decided to undertake a comprehensive review of the business in July after acknowledging that market conditions remain uncertain.
In Tuesday’s statement, the company said market uncertainty will continue to hurt secondary housing market sales and consumer confidence in the short term.
However, it added that the fundamental long-term growth drivers of the business remain robust with a shortage of housing in the UK and underinvestment in the maintenance and improvement of the existing, ageing, homes.
In morning trading, shares fell 1% to 1.090p.
Liberum repeats 'buy' recommendation
Liberum maintained a 'buy' rating and target price of 1,525p on the stock.
"The cost savings should enable profit progress even in a dull market, while the successful sale of plumbing and heating (perhaps for £400-500mln) should mean that capital can be recycled into more profitable businesses," it said.
"The shares look cheap on a free cash flow yield of over 10%, especially as management is aiming to drive free cash flow by improving returns and now that capital expenditure has likely peaked."