ii view: Ferguson beats forecasts ahead of planned demerger

Plumbing merchant Ferguson is demerging UK business Wolseley, and investors are asking questions.

Full-year results to 31 July 2019

• Revenue up 6.1% to $22 billion
• Pre-tax profit up 11.5% to $1.32 billion
• Net debt up 10.6% to $1.19 billion
• Final dividend up 10% to 145.1 cents
• Total dividend for the year up 10% to 208.2 cents

Chief executive John Martin said:

"Ferguson performed strongly in 2019 with organic growth in the US of 6.2% and substantial investments in acquisitions to further consolidate our market leading positions. Markets weakened in the second half but our well-executed approach to expanding gross margins and decisive cost control measures ensured strong profit delivery. 

"The board expects to make further good progress in the year ahead. Whilst US market growth is currently broadly flat, consistent with the second half of 2019, we expect to continue to outperform.

"We recently proposed the demerger of our UK operations and work on this is progressing well. We have also announced that as part of our orderly succession plans Kevin Murphy will succeed me as group chief executive in November. We are assessing the most appropriate listing structure for the group going forward and we will continue to consult with shareholders."

ii round-up:

Ferguson (LSE:FERG) is a major trade distributor of plumbing and heating products across the US, UK and Canada. 

Operating from over 2,200 outlets and trading under the Wolseley name in the UK, it generates 84% of its revenue from the US. 

At the start of 2019, it sold its Dutch unit, the last of its Central European businesses. 

Management is now working on the demerger of its UK Wolseley business. 

For a round-up of these full-year results, please click here. 

ii view:

Trian Partners, the US activist fund run by Nelson Peltz, previously acquired a 6% stake in the company. Trian noted that the company was "an attractive business that trades at a discount to comparable US peers".  Ferguson in early September announced plans to demerge its UK Wolseley business. Management is now considering the most appropriate listing structure for the group.

For investors, a 20%-plus gain in the share price since early June suggests that moves by Trian and Ferguson's management are having a positive impact. Possible separate stock market listings for Ferguson in the US and Wolseley in the UK could prove difficult for some UK focused investment funds, potentially generating some forced selling. Equally, retail investors may not wish to hold an individual company listed in the US.

Furthermore, prospects for each would need to be accessed separately, making assessments for both the US and UK housing markets. But Ferguson remains a well-managed company with an emphasis on shareholder returns – the dividend payment was increased by 10%.  For now, a 'wait and see' approach is arguably the most sensible. 

Positives: 

• A listing in the US may reduce the valuation discount compared to US peers
• $350 million left of a $500 million share buy-back programme
• Overhauling its UK arm, axing branches and quitting its unprofitable wholesale business

Negatives:

• Organic US revenue growth moderated – up 9.6% in Q1 / up 3% in Q4
• Canadian organic revenue down 5.2% in Q4 - Residential markets weakened throughout the year
• Separating the UK business reduces geographical diversification

The average rating of stock market analysts:

Buy