It is frequently said of the Kingfiaher Group (LSE:KGF) that “a sum of the parts” valuation would total to much more than the current market capitalisation. What then usually follows is a statement to the effect that the company should be broken up, with a particular focus on liberating the “jewel in the crown” Screwfix.
I question that logic, especially given the much greater degree of integration painfully forged across its markets in the UK, Ireland, France, Iberia, Romania and Poland in the last four years. It will be costly to split it now (redundancies, new IT, new senior teams, logistics networks, etc.), and many of the hard fought-for buying synergies will disappear.
Far better to do something much more mundane and long term: concentrate on doing the ordinary extraordinarily well. Don’t go dashing off looking for growth with dramatic sounding strategic moves, just get on with day to day improvements in every aspect of the business, from product selection to keeping a close eye on competitor pricing and tactics.
This has been a slow-growth company over the last thirteen years, with turnover not even keeping pace with inflation, and earnings per share much the same in the most recent five years as in the five years before that.
The question is: if the past thirteen years is representative of the future in terms of earnings power, would we be content to buy these shares at 250p (MCap £5.04bn)?
Average EPS is 22.2p, giving a cyclically adjusted price earnings ratio of 250p/22.2p = 11.3. (That is an earnings yield of 8.9%)
The CAPE is less than the average for UK shares which is good, but it is not in single digit territory, so is not well and truly a bargain.
We’ll have a look at owner earning numbers later, but my preliminary impression is that little additional investment is needed in working capital and capex if the company maintains its no-growth trajectory, so we could, perhaps, imagine all of the reported earnings flow coming to shareholders.
An 8.9% earnings yield these days is not to be sniffed at. More than half of that is already coming from the 5% dividend yield; the remainder is likely to come from dividend growth and using future surplus cash to repurchase shares.
Note the total paid out in dividends and buybacks has averaged £329m in the last five years, that is 15.7p per share or 6.3% of the current share price.
Of course, if the directors can identify projects able to generate goodly rates of return shareholders will support the investment required, lowering near term cash flow to shareholders, but shifting the company to positive growth in earnings and a more rapidly rising dividend.
But, in judging whether these shares are good value much depends on the strategic positioning of the various operations – are they strong businesses, or even franchises? Is there some pricing power?
To shed some light in this area I’ll look at each market in turn:
United Kingdom and Ireland.........
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