Kingfisher heading for long-term growth
When Kingfisher embarked on a strategy of expanding overseas through acquisitions in the 1990s it added plenty of sales, but power squabbles between the senior managers around the various operations thwarted attempts to introduce common practices and derive synergy benefits.
By Glynn Davis, City editor
Ten years down the line and under current chief executive Ian Cheshire, integrating the various Kingfisher divisions now looks a distinct possibility. And it is this prospect that is putting a very attractive label on the group – that of a long-term growth vehicle.
If the company can introduce common product ranges to the B&Q UK and China stores, the Brico Depot and Castorama outlets in France, and its units in Russia and Spain that is then complimented with a smaller range of market-specific lines then there will be enormous cost efficiencies to be enjoyed.
It must have proved frustrating for management over the years to have different parts of the company buying the same products from the same suppliers and not being able to benefit from any combined buying power.
Cheshire is making progress on this front as a result of not only being a new broom but also from the upheaval in the global economy, which has enabled him to bring in major changes across the group. Credit Suisse reckons that such change will also enable Kingfisher to expand at a greater pace in the future and at lower cost, which should address the issue raised by analysts about its return on investment from overseas ventures.
This is all further down the line, however, and for now the market is focusing on current trading as the group is due to report its third-quarter trading update on December 3. The expectations are for the core B&Q UK stores to have further benefited from underlying market conditions and from successful cost containment.
A like-for-like uplift of around five per cent in the UK over Q3 looks likely, in China flat like-for-likes are expected, and although France is forecast to record declines, with up to a five per cent fall at Brico Depot and up to a one per cent drop at Castorama, the trend shows improved trading patterns.
These improved trends and reduced losses in the company’s more problematic markets have resulted in ongoing updates by analysts to their forecasts. This has, not surprisingly, had a positive effect on the shares – they stood at a 12-month low of 110.6p on December 1 last year and now one year later they trade at around the 240p level.
There is a widespread view that there are more upgrades to come as management further gets to grips with margins and gains traction in the emerging markets (namely China and Russia) where the businesses is effectively on the books for free.
There is the likelihood that these markets and other newer territories could surprise the City as management has been initiating some strong action (certainly in China) and trading figures have been showing impressive improvements.
The increasingly favorable characteristics of the Kingfisher business has enabled net debt to be reduced and the expectation is that it will fall by around 50 per cent to £500 million by the start of 2010.
Credit Suisse regards this as an important development as it will result in an upgraded debt rating for the group that will in turn attract a new set of investors to Kingfisher. These investors will be in time to potentially benefit from the group finally reaping the full rewards from its international operations, a decent chunk of which has to date eluded the company.
