Trian plan gets good hearing at Ferguson

Russ Mould
3 September 2019

“The decision by Ferguson to spin off its UK operations, following the sale of its Scandinavian operations, means the firm is now almost a pure play on North America. Throw in the appointment of Virginia-based Kevin Murphy as the firm’s new chief executive officer as of 19th November, as John Martin steps aside after barely three years in charge, and Ferguson – which already reports its accounts in dollars - looks to be laying the groundwork for a shift in its listing from the UK to the USA,” says Russ Mould, AJ Bell Investment Director.

“This will be music to the ears of American activist investor Nelson Peltz, whose Trian Partners vehicle took a 6% stake in June and pointed out that Ferguson traded at a substantial valuation discount relative to its US peers.

“Ferguson is already running a share buyback programme but tidying up the corporate structure to make the company a pure play on the USA would be one way of potentially closing up the discount, especially as the non-US operations are way less profitable than the American ones. 

“In the last reported financial year, 80% of Ferguson’s sales and more than 90% of trading profit came from the US, with the UK providing 12% and 5% respectively.

 

Year to July 2018

 

Sales ($m)

% of total

Trading profit ($m)

Trading margin (%)

% of total

USA

16,670

80.3%

1,406

8.4%

93.3%

UK

2,568

12.4%

73

2.8%

4.8%

Canada/Central Europe

1,514

7.3%

83

5.5%

5.5%

Central costs

 

 

(55)

 

(3.6%)

Total

20,752

100%

1,507

7.3%

100%

Source: Company accounts

“It certainly looks as if Ferguson is taking Trian’s views on board, as the programme of buybacks, changes to the corporate structure and possibly a shift in listing – or at least a move to a dual-listing in the US and UK – comes straight out of the activist investor’s playbook.

“Activists tend to look for strategic, operational, financial or managerial changes (or a combination of them) to boost share price performance. Classic strategies tend to include:

Strategic options: spin or sell
•    Asset disposals or spin-offs to recognise value
•    Break-up
•    Put the company in play for a bid 

Financial options: more effective capital allocation
•    Share buybacks
•    Special dividends
•    Dividend initiation or increases

Operational angles: improve performance
•    Change the management
•    Sale and leaseback of assets
•    Close or restructure poorly performing units

Governance: improve reputation and lower risk
•    Rein in excessive executive remuneration
•    Ensure board has right balance, executive and non-executive
•    Better align management and shareholder interests

“The proposed changes at Ferguson tick a lot of these boxes and there can be no denying that the company’s shares trade at a valuation discount to those of its most comparable US rivals, Home Depot and Lowe’s. Although it already trades at a premium to Kohl’s, this may help to explain why Ferguson’s shares are up this morning and top the FTSE 100 leader board in early trading.”

 

 

Price/earnings ratio (x)

Growth in EPS

Operating margin (%)

 

Share price

2019E

2020E

2019E

2020E

2018

Ferguson

£62.56

15.2x

14.7x

13%

3%

7.3% (8.4% USA only)

Kingfisher

£1.95

9.1x

8.2x

9%

11%

6.4%

 

 

 

 

 

 

 

Home Depot

$227.9

22.5x

20.9x

4%

8%

14.4%

Kohl’s

$47.3

9.0x

8.9x

8%

2%

7.2%

Lowe’s

$112.2

19.8x

17.0

11%

17%

5.6%

Source: Sharecast, NASDAQ.com, analysts’ consensus forecasts

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