Kingfisher rides lockdown DIY boom and Melrose posts second quarter loss

“It has been an interesting start to the second half for the markets as they swing between despair at the mounting number of Covid-19 cases across the globe and hope driven by financial stimulus and developments on a potential vaccine, says AJ Bell Investment Director Russ Mould.

“Today may not have been a day of despair but there was a downbeat feel, with the FTSE 100 trading down 0.5% to 6,239.72.

“This followed a mixed session in the US and selling in Asia. Earnings later from Microsoft and Tesla could help define the trading pattern for the remainder of the week.

“Corporate news should also pick up in the UK from next week onwards as first-half results reveal the full damage wrought by coronavirus.”

Kingfisher

“It’s been a long time since DIY shops group Kingfisher delivered some good news. Unsurprisingly trading has been very strong in the second quarter as households spend lockdown doing up their homes. This is the tailwind Kingfisher has desperately needed to get back on its feet after such a long period of struggling.

“Anyone stuck at home will have been staring at their four walls and perhaps wondering why they’ve lived with peeling paint, grubby skirting boards and rotting garden sheds for so long.

“Lockdown has shifted consumers’ focus from leisure experiences and commuting to improving the home environment.

“Shops like Kingfisher’s B&Q have been natural choice for households to go and pick up bits and bobs to make their home look smarter. The large sized stores in Kingfisher’s estate will have also made it easier to adhere to social distancing measures, so really DIY companies have been a role model for how retail can work in the new world.

“The big question for Kingfisher is can it sustain the sales growth momentum? As more people return to work and lockdown measures start to ease, consumers’ focus could easily shift away from the home and back to the lifestyle they once enjoyed.

“Kingfisher has been trying to fix its business for years with limited success and so management really need to stay focused on their own repair job than celebrating short-term gains.”

Melrose Industries

“Engineering firm Melrose is right in the teeth of the coronavirus crisis as both of its main end markets – the automotive and aerospace industries – have suffered disproportionately from its impact.

“That’s reflected in the second quarter loss revealed by the latest trading update and the decision not to pay a first-half dividend.

“The pain looks deeper and longer lasting for the aerospace division, and it seems likely the inevitable job cuts flagged by the company are concentrated here.

“Automotive appears to be on the road to recovery but Melrose acknowledges there may be speed bumps along the way.

“Car demand could be boosted by the pandemic as people shun public transport due to the risk of infection, although this needs to be balanced against the hit to consumer spending from a prolonged downturn.

“One thing in the company’s favour is that it has specialised over a number of years in acquiring and turning around underperforming manufacturing businesses, with a focus on driving operational improvements and boosting cash generation.

“There was a big fuss when Melrose bought UK industrial stalwart GKN in a hostile takeover in 2018. However in some respects Melrose is a decent fit as owner of the assets in the current circumstances.

“It will need all of its skills and more if it is to come out the other side of this crisis without irreparable damage.

“Achieving a cash-neutral position in the first six months of 2020 was a reasonable start but the company is still staring down the barrel of an elevated net debt position.”

These articles are for information purposes only and are not a personal recommendation or advice.