Kingfisher Plc

Kingfisher Plc (KGF) is a general retailers company supplying home improvement products and services through a network of online channels and retail stores. The company caters the needs of nearly 6 million customers from 10 countries. The company has an employee base of around 77,300 people with nearly 1,331 stores. The company business operations are spread across the United Kingdom, Ireland, France and Other International geographical segments.

Trading Update Q3
On 20th November 2019, Kingfisher announced its trading update for the third quarter ending 31st October 2019. The company’s total sales were down by 3.2 per cent based in CER (constant exchange rate) for the period. On a like-for-like basis, the sales were down by 3.7 per cent due to softer market conditions in company’s key markets, ongoing operational challenges in French business, lower promotional activity and disruption from new range implementations. The company is focusing on its supply chain efficiency and IT effectiveness, to improve performance from its Castorama France business. The company expects its gross margin % for the full year to remain flat for the period.

Financial Highlights – H1 Financial Year 2020 (31^st July 2019, GBP, million)

(Source: Interim Report, Company Website)
 
In the first half of the financial year 2020, the group's sales slumped by 1.4 per cent on a reported basis, 0.9 per cent on a constant currency basis and 1.8 per cent on a like-for-like (LFL) basis to £5,997 million. However, gross margin expanded by 60 bps on a constant and reported basis as well. Underlying pre-tax profit plummeted by 6.4 per cent to £353 million in H1 FY2020 from £377 million in H1 FY2019. The adjusted pre-tax profit climbed by 3.7 per cent to £337 million in H1 FY2020 from £325 million reported in the same period of the previous financial year. Underlying basic earnings per share reduced by 3.9 per cent to 12.3 pence from 12.8 pence a year ago. However, despite a slump in the underlying basic earnings per share, the dividend declared by the group for the six-months ended on July 31, 2019 remained flat at 3.33 pence. The group’s net debt at the end of H1FY20 declined to £2,384 million.
 
Share Price Performance
 

Daily Chart as at 21st November 2019, before the market closed (Source: Thomson Reuters)

On November 21^st, 2019, Kingfisher Plc shares were trading at GBX 191.65 at the time of writing before the market close (at 9:08 AM GMT), down by 1.21 per cent against the last day closing price. Stock's 52 weeks High and Low are GBX 268.20/GBX 185.90.

Valuation Methodology

*Peers: Dixons Carphone Plc, Next Plc, Associated British Foods Plc and Marks and Spencer Group Plc.
Conclusion
 
The decline in the earnings momentum was impacted by the challenging trading conditions in France and the UK. This combined with higher-than-expected disruption and costs attached to the transformation plan itself has resulted in a continued decline in the LFL sales in the core Castorama and B&Q banners. With the UK and French housing markets expected to remain subdued for the foreseeable future and execution issues in France impacting on the delivery of transformation plan.
 
Keeping in mind the risks faced by the company, investors are recommended to keep a “WATCH” on the stock at the closing price of GBX 194.00 (as on 20^th November 2019), with support from few catalysts needs to be evaluated at a later stage.
 

Direct Line Insurance Plc

Direct Line Insurance Group Plc (DLG) is a general insurance company based out of the United Kingdom. The company, along with its subsidiaries, provides a range of personal and commercial non-life insurance products. The company differentiates its business in four operating segments: Home, Motor, Commercial and Rescue and other personal lines.
Trading Update
On 20th November 2019, Direct Line Insurance Group announced its trading update for the third quarter ending 30th September 2019. The company witnessed signs of improvement in the second half of the financial year. The company’s gross written premium from motor business surged by 0.3 per cent versus Q3  FY2018 data. The company’s gross written premium from home business declined by 4.9 per cent versus Q3 FY2018 data. The gross written premium from Rescue and other personal lines was up by 3.5 per cent versus Q3 FY2018 data. The company’s direct Rescue brand, Green Flag’s gross written premiums surged by 15.5 per cent versus Q3 FY2018 data. The gross written premium from Commercial business was up by 5.3 per cent versus Q3 FY2018 data.
Financial Highlights – H1 Financial Year 2019 (30 June 2019, £, million)

(Source: Interim Report, Company Website)
 
In the first half of the financial year 2019, in-force policies from direct-own-brands increased by 2 per cent to 7,155 thousand against the year-ago period. The gross written premium from direct-own-brands declined by 2.4 per cent to £1,072.2 million in H1 FY2019 from £1,099 million in H1 FY2018, driven by lower investment return and reduction in the underwriting profit. Return on tangible equity stood at 20.9 per cent in H1 FY2019 against 21.9 per cent in H1 FY2018. The company's combined operating ratio was 92.5 per cent in H1 FY2019, an increase of 0.4 per cent. The company’s basic earnings per share declined by 11.3 per cent to 14.9 pence in H1 FY2019 against 16.8 pence in H1 FY2018. Interim Dividend per share rose by 2.9 per cent to 7.2 pence against 7 pence recorded in H1 FY2018.
 
Share Price Performance

Daily Chart as at 21^st November 2019, before the market closed (Source: Thomson Reuters)
On November 21^st, 2019, Direct Line Insurance Group Plc shares were trading at GBX 289.10 at the time of writing before the market close (at 12:40 PM GMT), down by 5.24 per cent against the last day closing price. Stock's 52 weeks High and Low are GBX 358.69/GBX 266.70.
Valuation Methodology

*Peers: Admiral Group Plc, Hiscox Ltd, RSA Insurance Group Plc and Phoenix Group Holdings Plc.


Conclusion
The group is improving its operational excellence and deployed management information tools and new data in the first half of 2019. The company is planning for additional product releases, comprising tradesperson products and transitioning Van on to the new system.

The company endures targeting a combined operating ratio of 93 per cent to 95 per cent for the year 2019. In the financial year 2019, the company anticipates making additional progress in reducing operating costs and is targeting operating expenses of below 700 million pounds.

The company anticipates a net investment yield of 2 per cent in 2019. In FY19, targeted return on tangible equity stood at 15%.

Company is successfully eliminating costs from the enterprise and making decent progress on transforming the company’s IT systems (like with the preliminary launch of the new Motor platform). These are designed to reinforce the abilities substantially, to improve client experience and to enable them to be more competitive.

Over the course of 4 years (FY14 - FY18), the company’s revenue surged from GBP 3,349.10 million in FY14 to GBP 3,436.70 million in FY18. Compounded annual growth rate (CAGR) stood at 0.65 per cent.

Keeping in mind the healthy prospects of the group, and supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 274.70 (as on 20^th November 2019) with single-digit upside potential, based on the 10.70x NTM Price/Earnings multiple (approx.) on the FY19E earnings per share (approx.).
 
*All forecasted figures and peers have been taken from Thomson Reuters.
*The “Buy” recommendation is valid for the current price as covered in the report (as on 21st November 2019).

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