“In some ways, the real work for Kingfisher starts now.”
That’s at least according to Russ Mould, an investment director at AJ Bell.
The DIY and home improvements retailer posted its first-quarter results for the three months ending 31 March 2022, with shares bouncing 2% to 253p.
Today’s results from the FTSE 100 constituent provided some much-needed relief to the ailing share price which has tumbled 26% this year as the threat of inflation and recession hit consumer-facing stocks. Over the same period, the FTSE 100 is down only 0.34% this year.
Given its share price movement this year it is natural to wonder whether the shares have drifted into buying territory but with the lockdown boom the company experienced seemingly over, could it be the proverbial value trap or is it the real deal?
Time for a bit of DIY research ...
Investors get their money
Also announced by Kingfisher today was a £300mln share buyback, with the first tranche of this commencing soon.
This latest buyback is on top of the £300mln repurchase that was completed last month, meaning investors will probably see £600mln of surplus cash returned.
Further to that, the London-listed company’s forecast dividend yield is 4.8%, meaning over the course of the year it will payout 4.8% of its share price back to shareholders.
All that suggests that, from an investor point of view, Kingfisher is certainly one for the income seekers as opposed to the capital appreciation crowd.
Now, compare that to JD Sports Fashion, another Footsie retailer, albeit in a different sector which had a dividend yield of 1.4% for 2021, and it’s clear that Kingfisher is an attractive prospect for shareholders looking for a payout.
According to Richard Hunter, head of markets at interactive investor, the share buyback was enabled by “the company’s cash generation,” which was supported by a 16% growth in sales compared to 2019, the last pre-pandemic reporting year.
“Kingfisher is unquestionably in a better position than it was leading up to the pandemic,” Hunter added.
Macro-factors causing uncertainty
Despite Kingfisher’s relatively strong performance, it is not been immune to current macro conditions.
Chief executive Thierry Garnier said in the statement that the company continues to “effectively manage inflationary and supply chain pressures.”
However, Hunter believes that it “cannot manage the current economic outlook and the propensity of the consumer to spend, which has inevitably weighed on the performance of the stock.”
Hunter also adds that the focus has now switched from Kingfisher previously worrying about pent-up holiday demand replacing DIY demand to macroeconomic issues over the next few months, which are “likely to represent a demanding time if the cost living crisis emerges as is largely expected.”
Strong price/earnings
Another metric where it can be argued that Kingfisher excels is its low price/earnings ratio (PER).
Kingfisher’s current forecast PER is 8.8 (based on analysts’ earnings forecasts), compared to the three year-average of 9.2.
In that sense, the stock could be considered cheap relative to its past valuation.
According to Statista, the PER for the retail and trade sector in Western Europe, where Kingfisher largely operates, is in the low thirties, which would suggest that Kingfisher is currently undervalued.
Alternatively, its PER could be lower because it simply isn’t a good investment option due to a few
reasons, such as poor fundamentals or that the sector is declining.
Resilient sales
Perhaps to no one’s surprise, Kingfisher’s sales weren’t as strong compared to the two lockdown years that preceded it, largely due to that pent up demand easing.
However, compared to pre-pandemic levels, which would arguably be a better mark of true performance with ‘normal’ market conditions, sales were up 16%.
“Sales are proving more resilient than some might have feared,” according to Mould.
“This suggests there is still some pent-up demand for home improvement despite the pressures on household budgets.”
The group also saw a 164% increase in online sales, which now account for more than 16% of its total sales, more than double what it was in 2019.
Strong sales performance relative to pre-pandemic levels clearly suggests that there is still some demand for DIY and home improvements.
Of course, a lot of that demand will undoubtedly depend on how much pressure is applied to the purses of householders.
What do the brokers say?
The consensus among the brokers on Kingfisher is a ‘hold’, as opposed to a ‘buy’ or a ‘sell.’
Given the pros and cons mentioned above, that is not surprising.
Kingfisher so far this year has performed well against the backdrop of macro-conditions, and continues to reward investors through buybacks and a strong dividend yield.
However, rising inflation and the cost of living crisis is bound to hit more and more people as the situation worsens, and it’s safe to say that DIY services will be one of the first to face the chop for consumers.
As Mould said, the real work starts now for Kingfisher.