Interactive Investor

Insider: directors think these shares are a bargain

10th July 2023 09:17

by Graeme Evans from interactive investor

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Both these companies have enjoyed success in the past, but shares now trade at their lowest in 2023 so far. Bosses think this is the time to buy.

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Kingfisher (LSE:KGF) shares worth £160,000 have been bought by a former Home Depot executive whose “deep knowledge” of the DIY sector is now helping the B&Q owner.

Bill Lennie, who joined Kingfisher as a non-executive director in May 2022 after 26 years at the world’s largest home improvement chain, made his investment with the FTSE 100-listed stock trading near its lowest point this year.

The shares closed last week at 224.1p, having fallen from 290p in March amid fears that higher-for-longer interest rates will slow the housing market and curb spending on DIY and home improvement projects.

The sell-off has accelerated in recent weeks, despite the company reporting resilient levels of demand for the core and “big ticket” categories that account for 82% of total sales.

In its first quarter update at the end of May, Kingfisher said it continued to manage inflationary pressures effectively, and that improved trends on raw material prices and freight rates should mean lower product costs in the second half.

It is comfortable with City expectations for adjusted pre-tax profits of £634 million in 2023/24, including some £350 million in the first half. A surge in DIY and home improvement spending during the pandemic meant annual profits hit £949 million in 2021/22 before falling back 20% to £758 million in 2022/23.

The company has over 1,400 stores and more than 80,000 employees in eight countries, with the UK and Ireland contributing 48% of revenues through B&Q, Screwfix and TradePoint. France’s Castorama and Brico Depot generate about 34%.

Chief executive Thierry Garnier recently set out a new set of medium-term priorities focused on growth, cash generation and higher returns to shareholders.

He said: “We operate in attractive markets with new positive longer-term trends — such as more working from home and energy efficiency renovations — providing further support to the growth potential of the home improvement industry.”

The targets include more than £500 million of free cash flow from 2025/26, supported by profit growth and ongoing inventory self-help measures.

This year’s unwinding of cash outflows means Kingfisher is well placed to announce a new share buyback programme once the current £300 million plan finishes later this summer.

A final dividend of 8.60p was paid to shareholders last Monday, meaning an unchanged total for 2022/23 of 12.40p and in line with earnings cover in the range of 2.25 to 2.75 times.

With shares just below their average five-year price/earnings multiple of 10.4 times, UBS continues to have a “sell” recommendation and 220p price target.

As well as the uncertain outlook for housing transactions and consumer sentiment, the City firm is concerned that, of the stocks that it covers, Kingfisher is most exposed to a potential structural shift away from DIY towards do-it-for-me.

In contrast, analysts at RBC have an “outperform” recommendation after last week highlighting a new price target of 275p.

Lennie’s 70,000 shares were bought on Wednesday at 227.7p, taking his overall holding to 170,000 shares. He retired from Home Depot in 2021, having held several senior leadership roles including most recently as executive vice president, Outside Sales and Services.

Kingfisher chair Andy Cosslett said that Lennie’s “deep knowledge” of the sector has been very much in evidence in his dealings with both executive and board colleagues.

Cosslett added in the annual report: “Bill will be a great asset to the business going forward.”

Is tide about to turn for this retailer?

Two directors at Currys (LSE:CURY) have spent £100,000 in a show of support after shares in the home electricals chain crashed to a 14-year low on Thursday.

The FTSE 250-listed stock closed last week at 49.4p after the retailer pulled the plug on its final dividend in order to prioritise its balance sheet.

The cash preservation move revealed in annual results comes after a year in which Currys has been battered by a fierce price war in the Nordics.

The division’s profits slumped 82% to £26 million, whereas the “very encouraging trajectory” in UK and Ireland showed growth of 45% to £170 million on sales of £5.1 billion.

Alongside a bottom-line loss of £450 million, year-end net debt swung to £97 million from a cash position of £44 million the previous year.

Currys is reducing contributions to the pension scheme over the next two years and has agreed a covenant relaxation for the period up to October 2024.

Chief executive Alex Baldock is taking a prudent approach and said the company will be wary of optimism about consumer spending power.

He added: “We may be cautious in our promises for the short-term, but our confidence is undimmed as we build a stronger and more resilient business that is fit to prosper in the longer term."

Chief financial officer Bruce Marsh bought £30,000 of shares and chair Ian Dyson spent £71,000 at 46.69p and 47.56p respectively, compared with near to 54p prior to annual results.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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