Good Evening,
A long day, and limited time for any thoughts tomorrow as its Cheltenham Gold Cup and tardiness is not allowed. We have Indiana (Ian) heading back to honour us with his company for the weekend +2 days, as he never replies to text at least he can read here that Hippo's sweetie is stuck the vent of his car.
Some thoughts on the train home, with Kingfisher’s (KGF) preliminary results due on the 31st
of this month, with Homebase's performance not instilling much in the way of
confidence for KGF.
France, as a country, has struggled to achieve anywhere near
the 2% EuroZone target and is now in deflation. The outlook for retail
including DIY and building projects isn't positive as a result of the
deflationary pressures.
Psychologically, we as the consumers (surprisingly the same in France) delay purchases (especially significant purchases) for longer when in a
deflationary environment, in the hope goods or services will become
cheaper. Last November, Kingfisher's French Castorama and Brico Dépôt sales
declined adding to an overall 11.8% fall in profits to £225m. The cause
was clearly weak consumer confidence in France (and Europe) and
adverse currency moves, which have continued through to January 2015.
More recently, France had a 0.4% decline in annualised
prices in January (released March 2015). This previously occurred after the
financial crisis in 2009/2010 where the French economy slipped into deflation
(notably margin pressure from consumers), so the read across for the economy
does not bode well in the short-term.
Kingfisher's bottom line will be under-pressure not only by
the currency strength of the pound (in reporting terms) but France's weakness
in addition to the retail outlook in Germany, Poland, Portugal, Romania and
Russia (Ruble watch out) along with their margins. Fools bet against buybacks
of considerable size, however Kingfisher are likely to cap their price in the
coming weeks. Save for some short-term momentum in the SP by the closing of the B&Q China deal for £140M.
The market should rightly be cautious about KGF performance, excluding
the UK & Ireland revenue being marginally better (circa 2%). Kingfisher
is logically up on the share buyback and special dividend. One will be very
surprised if anything within KGF operations has been outstanding above and
beyond the known. Screwfix will most likely be the shining star and still cannibalising the margins over at B&Q.
With the buyback continuing for some time and being in the
market for circa 5-8% of the stock most days, its not rocket science to
know which way the stock was going. The news on the 31st March
should change sentiment, save for speculation of the PE boys liking KGF
cashflow and business model its hard to justify a target price of 270 excluding
B&Q China special dividend of 6 pence. One wouldn't rule out The Home Depot lining up Kingfisher, but speculation is short lived in the absence of news.
Whilst reviewing KGF, there was a fatal flaw in KGF
operations, that not only did the man from Halfords (Matt Davies) identify in
his strategy at Halfords, but changed the entire direction of the company. Having mused
the possibilities of KGF, it was wise to close the last of the KGF longs today.
(The prize for identifying the flaw is a pair of socks).
Atb Fraser
Dairy date of interest: PLUS500 (PLUS) Ex-dividend and special dividend date.
