Shares near 10-year high as Wolseley changes name

It's been a busy morning for blue-chip plumbing goods supplier Wolseley following an action-packed set of first-half results, which sent its share price up 8% to its highest in almost a decade Tuesday.

The headline news was a 25% jump in group trading profit to £515 million – 5% if you strip out a favourable currency effect due to sterling weakness – for the six months to 31 January. This time last year it was just £412 million.

Pre-tax profit fell 12% to £328 million, but that included a £102 million write-down at its struggling Swedish building materials business Beijer. There was also a healthy 10% increase in the interim dividend to 36.67p.

That was followed a plethora of other "significant news" reports, including a name change, to Ferguson plc; the retirement of its US chief executive, a 40-year veteran of the company; the disposal of its entire Nordic business; and a change in its reporting currency to US dollars.

"Ferguson now accounts for 84% of group trading profit and we have decided to align the group's name with our most significant brand in our largest market," explained chief executive John Martin. "Whilst the group will be known as Ferguson plc going forward we will continue to use the Wolseley name in the UK and Canada where it has strong local recognition."

Despite the rally back to prices last seen in 2007, brokers are generally positive on the stock, with Bank of America Merrill Lynch talking up the chance of a re-rating of the stock. "Taken together, we view the developments as positive," adds Barclays analyst Paul Checketts.

Both have 'buy' recommendations on Wolseley, with target prices of 5,600p, which implies a further 8% potential upside from a price of 5,190p Tuesday morning.

CEO Martin didn't give too much away, but said his company expects to make further progress in the second half as it continues to execute its strategy of "investing in profitable growth and expansion where appropriate while keeping tight control of the cost base".

Wolseley's UK business, which accounts for just 7% of group trading profit, continued to struggle, along with the rest of its European operations, with the UK heating market showing "little growth". Further, the repair, maintenance and improvement and social housing markets were also weak.

Like-for-like revenue in the UK was marginally higher (0.3%), including price inflation of 0.8%, while operating costs increased 3.5% and trading profit was down by £1 million year-on-year to £35 million. This comes after it confirmed last year it would close 80 UK branches and cut 800 jobs.

By contrast, its US operations are booming – led, no doubt, by Donald Trump's reflation trade, with the president's infrastructure spending plans benefiting building suppliers before a dollar is spent. As Wolseley's US business goes from strength to strength, plans to change its name to reflect its most successful brand, Ferguson, will be put to shareholders on 23 May at its AGM.

US residential and commercial markets continued to grow well, the company said, with Ferguson growing revenue by 5.4% on a like-for-like basis compared to 4.5% for the group overall.

The decision to begin reporting in US dollars, with effect from 1 August, will "remove the largest driver of translation volatility and provide greater transparency of the underlying performance of the group".

Driving future growth

Meanwhile, Frank Roach, the longstanding chief of Ferguson Enterprises, Wolseley's US subsidiary, has announced he will retire on 31 July. Roach has headed up Ferguson since 2009 and has been an employee of Wolseley for over 40 years. He has also been an executive director of Wolseley plc since 2005.

Roach will be replaced in both roles by Kevin Murphy, who has been chief operating officer of Ferguson for the past 10 years, having joined the company in 1999.

Having someone who has been with the business for almost 20 years, since his family's business - Midwest Pipe and Supply - was acquired by Ferguson, should help with stability. Indeed, Roach commented that Murphy has "played a vital part in our success to date". "His skills, expertise and deep understanding of the business make him the ideal person to drive future growth in the USA," he added.

Nordic markets overall were weak, the company said, though there has been some recovery in the last two months. Revenue from the region declined 2.3% from last year, with weaker market conditions in Denmark and Sweden.

Martin said a review of Wolseley's Nordic operating strategy "identified a clear and executable plan to return the business to profitable growth". However, he added there are "few synergies with the rest of the group's plumbing and heating businesses" so it will exit the region. Merrill Lynch forecasts this will mean its US business will account for 90%-plus of Wolseley's profits after the disposal, from 81% in full-year 2016.

Checketts concludes from the review that the company has "solicited enough interest that management believes an attractive price is possible now" and that if a reasonable multiple can be achieved, an exit is probably the best solution for a business that has disappointed.

Since slipping to a post-financial crisis low of 547p in March 2009, Wolseley has been heading upwards ever since and is almost 10 times that level now. With more focus on its booming US operation – becoming a US business with limited international exposure rather than a UK business with large US exposure, as Merrill Lynch puts it – there is surely scope to trend higher.

And, at 16 times forecast calendar year 2017 price/earnings (PE), Barclays reckons the stock "is attractive for a business that should be able to deliver high single-digit three-year earnings per share compound annual growth rate".

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. 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.