This report is an updated version of the report published on 06 June 2022 at 08:16 AM GMT+1.

Ferguson PLC (LON: FERG)

Ferguson PLC (LON: FERG) is an FTSE 100 index listed distributor of plumbing and heating products. The Company mainly operates in the United States, the United Kingdom, and Canada. 

The company expects to issue its Q3FY22 results on 14 June 2022.

Recent trend of dividend payments

The company has paid an interim dividend of US$0.84 per share on 6 May 2022, for the period H1FY22. This reflects an increase of 15% on the prior corresponding period.

 (Source: LSE, chart created by Kalkine Group) 

Growth Prospects

• Strong Q2FY22 Performance: The company reported robust sales growth of 31.8% in Q2FY22 to US$6,508 million, compared to the prior corresponding period. Sales were further complemented by an increase of 20 basis points in gross margins to 30.6%, while managing price inflation and partly offset by changes in business mix.
• Share Buyback: The Group has announced in September 2021 to repurchase up to US$1 billion of shares. On 15 March 2022, it has announced an increase of US$1 billion to its share buyback program to bring the total to US$2 billion.
• Bond Financing: The company closed a two-tranche US$1.0 billion bond offering on 20 April 2022. It comprised of US$300 million aggregate principal amount 4.25% notes due on 20 April 2027, and US$700 million aggregate amount 4.65% notes due 20 April 2032. The management plans to utilise the proceeds for general corporate purposes and repayment of existing debt.

Key Risks 

• Macro Concerns: The Group’s business performance is exposed to macro factors like supply chain issues, inflation, and interest rates. The current high inflation levels and rising interest rates pose a challenge to the company in the medium term.
• Regulatory Risk: The company has operations in different geographies and as such is prone to the regulatory purview of local Governments.
• Margin Risk: The company at times may not be able to retain the margin levels produced historically, owing to demand constraints and low operating leverage. 

Key Fundamental and Shareholders Statistics of Ferguson PLC.

BlackRock Investment Management (UK) Ltd. is the most significant shareholder as it holds nearly 16.33 million shares.

H1 FY22 Financial Highlights (for the period ended 31 January 2022, as on 15 March 2022)

(Source: Company Filings)

• Decent Fundamentals: The Group delivered an operating profit of US$1,294 million in H1FY22, reflecting an increase of 68.3% from H1FY21. The Growth has been aided by a decent revenue base, expansion in gross margins, and cost control measures which led to strong operating leverage.
• Acquisitions: The company completed six acquisitions in H1FY22, with annualized revenues of approximately US$235 million.
• Gain in Market Share: FERG demonstrated impressive performance during the period with continued market share gains and decent price realization. The earnings growth outpaced revenue performance, reflecting an improvement in the operating leverage of the company.

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

At the close of 01 June 2022, FERG’s shares were trading at GBX 9,312.00. Stock’s 52-week High and Low were GBX 13,640.00 and GBX 8,892.00, respectively.

On a daily chart, the stock is trading close to the lower Bollinger band with 14-day RSI level at ~41.61.

Valuation Methodology: Price/Earnings Approach (FY23E) (Illustrative)

Business Outlook

The company seems to be buoyed up after robust performance in H1FY22 and anticipates solid growth in revenue in the second half of the year. However, it expects that the tailwinds on gross margin in the first half will likely moderate in H2FY22. The management expects to continue with its growth momentum, aided by a strong balance sheet with a focus on returning capital to its shareholders. Following its growth trajectory, FERG has announced its primary listing on the New York Stock Exchange (NYSE) on 12 May 2022. This aligns with the company’s strategy to enable and create value in the foreseeable future, in its supportive end markets.

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the robust growth in revenue & earnings, expansion in gross margin, optimistic outlook, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Ferguson PLC at the closing market price of GBX 9,312.00 (as on 01 June 2022), with lower-double digit upside potential based on 14.96x Price/Earnings (approx.) on FY23E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.  

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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