Ferguson PLC’s (LON:FERG) valuation now better reflects the slowdown in US construction activity after years of exceptional growth, according to Berenberg.
Berenberg cut its recommendation on the shares of the plumbing and heating products producer to ‘hold’ from ‘buy’ and lowered its target price to 6,000p from 6,500p.
READ: Ferguson unveils buyback as softer US sales disappoint
The downgrade comes after a week during which Ferguson reported disappointing third-quarter organic sales growth and after US fund manager Trian bought a near-6% holding in the plumbers’ merchant.
Trian said it believed Ferguson was an attractive business that trades at a discount to comparable US peers and hopes to close that gap.
READ: Ferguson jumps as US fund manager Trian reveals it has a amassed a near 6% holding in the plumbers’ merchant
“We think the debate about a US listing and a UK disposal could thus resurface,” Berenberg said.
“Although both would be a positive catalyst in our view, we believe the former will take time and will be difficult with the current shareholder base, given the need for 75% shareholder approval.”
US division 'deserves to trade at a discount to peers'
Berenberg noted that Ferguson reported a slowdown in US like-for-like sales growth for the third quarter to 3.3%, compared to 9.6% in the first half.
The company expects US sales growth to slow to 3-5% in the second half.
“We still believe Ferguson will be able to outperform peers given its focus on service and position in the market, Berenberg said.
“However, with reduced certainty in end-markets, and the softening in the Canadian housing market, we think there is limited upward pressure on earnings.”
Berenberg said Ferguson has traded at a premium to the UK merchants and distributors for several years as it had delivered better like-for-like growth, margin expansion and higher returns thanks to a robust US construction market.
But with the US business now slowing, Berenberg had to re-evaluate its sum of the parts valuation for the group and believes the US division “deserves to trade at a discount for the five-year US peer average”.
In morning trading, shares were little changed at 5,610p.