ii view: UK demerger on track at plumbing merchant Ferguson

Profit rises in the US but falls in the UK and Canada. Management stays confident on the 2020 outlook.

First-quarter trading update

• Revenue up 5.3% to $5.21 billion
• Adjusted trading profit up 4.8% to $433 million
• Invested $62 million in acquisitions
• UK demerger progressing as planned
• Completed $400 million of the $500 million share buy back as at 31 October 2019

Chief executive John Martin said:

"Ferguson continued to take market share against a backdrop of flat US markets and we remain firmly focused on maximizing organic revenue growth, while tightly managing gross margins and costs. We are pleased that this disciplined approach enabled us to grow US trading profit in line with revenue growth in the quarter. Cash generation in the quarter was good and our balance sheet remains strong. We will continue to invest organically in our businesses and in selective bolt-on acquisitions which will be integrated into our network. 

"We expect to make further good progress in the year ahead. While US market growth is currently broadly flat we remain confident of outperforming our end markets and our order books support continued modest revenue growth in the months ahead. This strong focus on growth with continued cost and margin discipline gives us confidence in our expectations for the full year which remain unchanged."

ii round-up:

Ferguson 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 85% of its revenue from the US. 

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

For a round-up of this first-quarter trading update, please click here. 

ii view:

Trian Partners, the US activist fund run by Nelson Peltz, previously acquired a 6% stake in Ferguson (LSE:FERG). Trian noted that the company was “an attractive business that trades at a discount to comparable US peers”. Ferguson previously announced plans to demerge its UK Wolseley business. The demerger is on track and expected to complete during 2020.

For investors, a 20%-plus gain in the share price since early June 2019 suggests that moves by Trian and Ferguson’s management have had a positive impact. 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, making assessments for both the US and UK housing markets. But Ferguson remains a well-managed company with an emphasis on shareholder returns – the total 2019 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 (20% on 14 June 2019) compared to US peers
• $100 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 2019 / up 3.1% in Q1 2020
• Canadian organic revenue down 6.4% in Q1 - residential markets remained weak
• Separating the UK business reduces geographical diversification

The average rating of stock market analysts:

Strong hold