Overview
Ferguson Plc (Ticker Symbol: FERG) is a Switzerland-based holding company, specialising in the distribution of plumbing and heating products and is headquartered in Zug, Switzerland. Ferguson, formerly known by Wolseley plc, was founded in 1887 by Frederick York Wolseley. In July 2017, the company changed its name to Ferguson plc, after its largest brand in the US. John Martin is the current Group Chief Executive; he was appointed to the post in 2016. The company's American Depository Receipts (ADRs) are traded on the Over-The-Counter market in the USA, and its shares are listed in the UK on the London Stock exchange as well; it is a constituent of the FTSE100 index. With 2,280 branches spread across three regions with 19 distribution centres, the company aims to bridge the gap between the large supplier base and geographically scattered customers through its 5,900 strong fleet vehicles. The group is a specialist distributor and has served over 1 million customers who are assisted by the company's 35,000 associates. The majority of the customers are located within 20 miles of their home base and can access the local branch many times a week.

Geographical Segments
The group operates in three geographies - the United States, the United Kingdom, and Canada & Central Europe, which are also its operating segments.  The US business serves markets ranging from residential, commercial to industrial markets and has operations mainly under the Ferguson. The company has presence across all the 50 states and operates 1,448 branches which are served by ten distribution centres and has 26,501 associates working for it. The UK business serves the trade market and operates two businesses under the Wolseley brand, with Blended being the largest business within the UK, through 6 distribution centres serving 567 branches. The group has combined the Canada and Central Europe operating segments into one reportable segment and has operations in Canada and the Netherlands under the brand Wolseley Canada and Wasco, respectively. Both the brands primarily serve trade customers and has three distribution centres serving 265 branches.
 
Key Statistics
 
Recent Developments
Effective Nov. 19, 2018, the Ferguson Plc acquired Robertson Supply, which is one of the biggest wholesaler in the Idaho market of residential and commercial plumbing. The acquired company will now be rebranded as Robertson Supply, and currently has eight locations spanning Idaho and Oregon. The acquisition will enable Ferguson to expand its presence in the Northwest America, providing Ferguson a more substantial local footprint in Idaho and Oregon market.
 
Key Financial Metrics (Financial Year 2018, $m)

(Source: Company Filings)

Financial Highlights (FY2018, $m)
The statutory revenue increased by 7.6% to $20,752 million in FY 2018, against $19,284 million in FY 2017, while ongoing revenue of $20,752 million was reported which was 10.1% more than FY 2017. The ongoing organic revenue growth was 7.5%, driven by growth from acquisitions and favourable exchange rates. The ongoing gross margin was 29.2%, against 28.9% in FY 2017, reflecting an increase of 30 basis points. The improvement was due to improved procurement and disciplined pricing practices followed by the company. However, the ongoing operating expenses were 8.7% more than FY 2017, at constant exchange rates. The ongoing trading profit was $1,507 million in FY 2018, vs $1,307 million in FY 2017, reflecting an increase of 14.7% over the previous year at constant exchange rates. The ongoing trading margin increased to 7.3%, a rise of 40 basis points. The profit for the year attributable to shareholders rose to $1,267 million, from $920 million in FY 2017, due to improvement in profit of operating segments. Basic earnings per share was reported at 515.7c for FY 2018, against 366.1c for FY 2017, while headline earnings per share was 444.4c, an increase of 21.4%, predominantly due to the rise in trading profit during the year. The company reported strong cash flows during the FY 2018 with cash generated from operations of $1,323 million, against $1,410 million in FY 2017. The net debt increased to $1,080 million at 31 July 2018 from $706 million in FY 2017, reflecting an increase of $374 million. The majority of this increase was due to the share buyback completed in the year. The Group paid an interim dividend of 57.4 cents per share (FY 2017: 36.67 pence per share), this brings the total dividend to 189.3 cents, 21 per cent ahead of last year.
 
Financial Ratios

(Source: Thomson Reuters)

The company's profitability margins, though stable over the periods, were slightly below the industry median. Moreover, the profitability decreased in FY 2018. However, return on equity, at 19.4% was more than the industry median, highlighting a lower price of equity as compared to its competitors. The liquidity position was better than the industry and increased from the last two years. The quick ratio remained stable and was ahead against its peers. The leverage position was in line with the industry margin. The asset turnover ratio of the company was better than its peers and further increased in FY 2018, indicating the company efficiently utilises its resources.
 
Valuation Methodology

Method 1: Price/Earnings Multiple Approach (NTM)


To compare Ferguson with its peers, Price/Earnings multiple value has been used. The peers areReece Ltd(NTM P/E was 19.32), Richelieu Hardware Ltd (NTM P/E was 18.28),H & M Hennes & Mauritz AB(NTM P/E was 17.62), Travis Perkins PLC(NTM P/E was 12.99),CanWel Building Materials Group Ltd(NTM P/E was 11.23) and Howden Joinery Group PLC(NTM P/E was 14.38). The mean of Price/Earnings (NTM) of the company’s peers was 15.64x.

Method 2: Price/Book Multiple Approach (NTM) (Book Value Per Share (FY19E) approximately)


To compare Ferguson with its peers, Price/Book value multiple has been used. The peers are Howden Joinery Group PLC(NTM P/B was 4.47), H & M Hennes & Mauritz AB (NTM P/B was 4.01),Kingspan Group PLC(NTM P/B was 3.64), Ashtead Group PLC(NTM P/B was 3.49),Persimmon PLC(NTM P/B was 2.20) and Berkeley Group Holdings PLC(NTM P/B was 1.80). The median of Price/Book (NTM) of the company’s peers was 3.56x.

* All forecasted figures and peers have been taken from Thomson Reuters.
* At the time of writing the report, the exchange rate (£/$) was 1.3132)
 
Share Price Commentary
 
Daily Chart as at Mar-08-19, before the market close (Source: Thomson Reuters)

On 8th March 2019, at the time of writing (before market close), FERG shares were trading at GBX 5,210, down by 1.25 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 6,601.91/GBX 4,688.50. At the time of writing, the share was trading 21.07 per cent lower than its 52w High and 11.13 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 342,970.20; 30 days - 408,226.10 and 90 days - 600,964.69. The average traded volume for 5 days was down by 15.99 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 14.4x as compared to the industry median of 11.5x. The company’s stock beta was 0.8, reflecting relatively less volatility as compared to the benchmark index. The outstanding market capitalisation was around £12.32 billion and a dividend yield of 2.71 per cent.
 
Risks Assessment and Growth Prospects
The company faces increasing competition from the entry of new companies with lower-cost transactional business models or better technologies which have disrupted the industry. The company also faces risk from market cycles and macroeconomic conditions, though the group has maintained strong financials to manage the risks. Although the impending Brexit decision is not expected to cause any material impact on the company's financials, the uncertainty can impact the overall domestic market. The company's profit margins can be affected by changes in the cost of commodities or goods purchased or consolidation of suppliers. The growth in the US has continued to grow well and was widespread in the last quarter. Moreover, the current indicators augur well for its performance. Canada also reported strong results, though growth in the UK was only modest. The management expects to report full-year results in line with analysts' expectations.
 
Conclusion
Sustained growth, backed by strong performance in the US, is expected to be reported by the company. Moreover, an increase in the company's order books suggest that growth in the coming months is expected to persist. Based on strong fundamentals supported by buoyant market conditions and the valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 5,276 (as on 7th March 2019) with double-digit upside potential based on 15.64x NTM Price/Earnings on FY19E earnings per share and 3.56x NTM Price/Book on FY19E Book value per share.

*The buy recommendation is valid for the current price as covered by the report as on (8th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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