ii view: Ferguson moving slowly to the US

US sales have grown with a two-stage move to the US now being pursued. 

Trading and US share listing update

• Demerger of Wolseley UK on track to complete this calendar year
• Suspended $500 million share buy-back programme
• Paused acquisition activity due to current market uncertainty
• Cancelling the interim dividend payment

Chief executive Kevin Murphy said:

"Given the significant challenges of Covid-19 we have adjusted our operations rapidly to both safeguard the health and wellbeing of our associates but also to support essential services in our local markets.

"Ferguson is a strong and resilient business and our business model remains attractive and cash generative. We are taking appropriate actions on cost and cashflow given the uncertain near-term trading outlook. We have good liquidity which positions us well to navigate this period of uncertainty and to support the recovery when the effects of Covid-19 subside."

ii round-up:

Following consultation with its institutional shareholders, plumbing parts distributor Ferguson (LSE:FERG) will seek an additional share listing in its biggest US market – the US generates 85% of group sales.

This additional US stock market listing will be made following a reduction in current Covid-19 stock market uncertainty. The new US listing is expected to begin in the first half of 2021.

Within a year, management then expects to ask shareholders for approval to make this US listing its primary one. This two-stage move to the US will allow investors opportunity to sell shares should they be unable to or not want to hold US stocks. 

As for measures to address Covid-19, the previously announced interim dividend will be scrapped and both a $500 million share buy-back programme and a bolt-on acquisition programme suspended – all in order to conserve cash. 

The majority of US branches remain open. Revenue in the two-month period to the end of March gained by 8.2%, although sales growth had weakened towards the end of the period with preparations for reduced activity underway. Sales in both the UK and Canada fell.

The shares were little changed in early UK trading. 

Management is now unable to offer any estimates to the July year-end given current Covid-19 uncertainty. 

ii view:

A valuation for Ferguson below its US stock market peers originally saw US activist Nelson Peltz take a share stake in the company and propose a move to the US in an effort to reduce the valuation difference. Peltz’s Trian fund noted at the time that the company was “an attractive business that trades at a discount to comparable US peers”.  Now, and despite the interruption of Covid-19, the wheels of a move to the US are firmly in motion. 

For investors, a 36.5% gain in the share price over the course of 2019 suggests that moves toward the US have had a positive impact, although the shares are down over 20% in 2020. Going forward, possible separate stock market listings for Ferguson in the US and Wolseley in the UK could prove difficult for some UK only 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. But Ferguson remains a well-managed company with an emphasis, prior to Covid-19, on shareholder returns. For now, a ‘wait and see’ approach is arguably the most sensible. 

Positives: 

• US sales still growing
• Overhauling its UK arm, axing branches and quitting its unprofitable wholesale business

Negatives:

• Covid-19 has caused a suspension of shareholder returns
• Separating the UK business reduces geographical diversification

The average rating of stock market analysts:

Strong hold