Kingfisher PLC (LON:KGF) has the right plan to turnaround the business but economic uncertainty and lack of clarity over who will lead the DIY retailer is getting in the way of progress, Credit Suisse said.
Credit Suisse downgraded its recommendation on the stock to ‘neutral’ from ‘outperform’ and cut its target price to 240p from 255p after Kingfisher announced the departure of chief executive Véronique Laury alongside a 52.8% drop in full-year pre-tax profit.
READ: Kingfisher CEO Véronique Laury to leave as the B&Q owner posts slump in 2018 profit
Kingfisher, which owns B&Q and Screwfix in the UK and Castorama and Brico Depot in France, has entered the fourth year of its five-year restructuring plan, called “One Kingfisher”.
The transformation is set to cost £800mln over the five years and involves unifying product ranges across brands, investing in e-commerce and making cost savings.
The company was aiming to increase profits by £500mln after completing the overhaul but this target was ditched on Wednesday following a tough 2018.
'Downside risk' to economic outlook, uncertainty over management
“While we still believe "ONE Kingfisher" is the right plan, we believe the stock lacks a near-term catalyst and there is downside risk to the macro outlook in the UK and France,” Credit Suisse said.
Credit Suisse said it has four areas of concerns. The first is uncertainty over the management team.
Kingfisher has appointed John Wartig to replace finance director, Karen Witts, on an interim basis but is yet to announce a permanent successor while the group is searching for a new chief executive Laury.
“The appointment of an interim CFO suggests a permanent appointment is not imminent, and we assume it could take 6-12 months before a new CEO starts unless it is an internal hire,” Credit Suisse said.
Other concerns include a slow drop through of sourcing gains, no “magic bullet” through asset sales and the fact that a restructuring is “never done”.
Break-up or sale of operating companies 'not feasible'
The broker said given the increasing degree of integration, it does not believe that splitting up, or even selling operating companies – notably Screwfix – or the bulk of the £3.4bn of properties is” feasible, desirable or likely”.
On the One Kingfisher plan Credit Suisse noted that most mature incumbent retailers are in a” permanent state of restructuring”.
In Kingfisher’s case, it believes its turnaround plan will need to be followed by a move to a new common retail format, and potentially brand, involving major changes to the store network.
“The shares trade on 9.4x 12-month forward price-earnings ratio based on underlying earnings per share with 4.7% dividend yield,” Credit Suisse said.
“However this excludes the c£350mln transition cost over five years (£70mln per annum) and exceptional costs.
“We have increased our provision for further restructuring from £300mln to £500mln (23p/share), and taken a slightly more cautious approach to net working capital movement which trims our target price to 240p.”
In midday trading, shares in Kingfisher fell 0.3% to 226.4p.