ii view: Ferguson to return Wolseley sale proceeds

Now generating all its sales in North America, and with a dual UK and US listing, we assess prospects. 

First-half results to 31 January

• Revenue up 4.2% to $10.3 billion (£7.4 billion)
• Pre-tax profit up 17.7% to $739 million (£532 million)
• Interim dividend of 72.9 US cents per share
• New $400 million share buy-back announced
• Special dividend of 180 cents per share

Chief executive Kevin Murphy said:

"Ferguson delivered good top-line growth in the first half and despite challenging personal and professional circumstances, our associates continued to deliver for our customers. We continued to carefully manage the cost base to ensure excellent profit growth and solid cash flow generation. We remain confident in our strategy and are optimistic about our prospects in 2021 and beyond.”

ii round-up:

North American distributor of plumbing and heating products Ferguson (LSE:FERG) today announced both an increase in profits and the return of sale proceeds following the recent sale of its UK Wolseley business. 

Buoyed by both consumer demand for home improvements during lockdown and strong cost control, first-half pre-tax profit rose by 17.7% to $739 million (£532 million). Wolseley sale proceeds are to be returned to shareholders via a special dividend of 180 US cents per share in May. A new $400 million (£288 million) share buy-back programme was also announced.

Ferguson shares rose marginally in UK trading, having more than doubled from pandemic lows in March last year. Shares for DIY retailer Kingfisher (LSE:KGF) are up by a similar amount. Ferguson shares also begun trading additionally on the New York Stock Exchange on 8 March.

Revenue for its core US business rose by 4.1% to $9.7 billion (£7 billion). Sales in Canada improved by 5.2% to $605 million (£436 million). Second-quarter US organic sales growth of 3.4% followed on from growth of 3.3% in the first quarter and a fall of 2.4% in the final quarter of 2020 to the end of July.

An ordinary interim dividend of 72.9 US cents was declared, up from last year’s 67.5 cents per share. Its net debt to adjust profit (EBITDA) ratio fell to 0.6 times from 1.1 times this time last year. 

Accompanying outlook comments pointed to high single-digit organic revenue growth in the current third quarter. Despite second-half uncertainty, management expects to generate above-market revenue growth in good residential markets and aided by increasing inflation. 

On the downside, management expects this to be partially offset by increasing supply chain pressures, transportation costs and the reversal of temporary cost reduction actions taken during the initial stages of the lockdown starting last April.

ii view:

Having sold its UK Wolseley business early in 2021 for $420 million, Ferguson is now a major trade distributor of plumbing and heating products across both the US and Canada. There's also now a dual stock exchange listing for Ferguson shares in both the UK and US. These developments followed US activist investor Nelson Peltz highlighting the company’s discounted valuation against its US peers in 2019. Now the sales proceeds of the UK Wolseley business are to be returned to shareholders via a special dividend. 

For investors, a potential primary US stock market listing for Ferguson may not suit everyone. Some UK-only focused investment funds may decide to sell. Accompanying management outlook comments also add some caution. But sales growth in its key US market has been established and shareholder returns, following a period of pandemic uncertainty, had previously recommenced. Bolt-on acquisitions are back being made and an estimated dividend yield, excluding the proposed special dividend, in the region of 1.8% is not to be dismissed in an era of ultra-low interest rates. In all, Ferguson remains well managed with its attributes now being communicated to a series of US investors. 

Positives: 

• Robust financial position
• Commencing a new $400 million share buy-back programme

Negatives:

• Some outlook caution expressed by management
• Reduced geographical diversification

The average rating of stock market analysts:

Cautious buy