Kingfisher Plc - Significant liquidity headroom and decent financial position

Kingfisher Plc (LON: KGF) is a FTSE 100 listed Home Improvement Company, which operates retail brands including Castorama, Screwfix, B&Q, Koçtaş, and Brico Dépôt.

On 19 November 2020, the Company will announce the third-quarter trading update.

Rationale for Valuation – Expensive at GBX 290.90

• The stock has underperformed the benchmark index (FTSE 100) during the last five years period and delivered a negative return of 13.94% in the last five years.
• In the short-term, the UK market is likely to remain under pressure due to increased market volatility.
• The Company is trading near the 52-week high, raising doubts at the upside potential at current prices.
• No interim dividend, due to ongoing uncertainty.
• From the technical standpoint, 90-day RSI stood at 65.40, which means the stock price could decline in the short term.

Key Risks

• The restrictions and reductions in demand (due to COVID-19) could adversely affect the financial condition.
• Intensifying competition can also put downward pressure on sales and margins.
• Technology is constantly evolving, impacting customer-facing and back-office activities.

Financial Highlights (for the six months ended 31 July 2020, as on 22 September 2020)

(Source: Company Website)

• In H1 FY21, the Company has delivered resilient performance, with strong sales recovery in Q2 FY21.
• On a constant currency, the sales were down by 1.1% year-on-year in H1 FY20, with a decrease in LFL sales 1.6% year-on-year. The decrease in sales were driven by the adverse impact of COVID-19 in Q1 FY21.
• In constant currencies, the retail profit increased by 17.7% year-on-year, driven largely by a strong performance in the UK & Ireland, where sales and gross profit increased, and operating costs reduced.
• Due to the ongoing uncertainty, there is no H1 FY21 interim dividend.

One Year Share Price Chart

 Daily Chart as of 22 September 2020, after the market close (Source: Refinitiv, Thomson Reuters)

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

Conclusion

The first half of 2021 has been challenging due to the coronavirus crisis. The Company has shown decent start to the second half of 2021, with Group LFL sales was up by 16.6% (From 2 August until 19 September 2020) and growth across all banners and categories. The Company has taken significant operational and financial actions, after a decent demand for home improvement. As such, no specific financial guidance is provided for FY21. The Company is encouraging social distancing and limiting the number of customers in the opened stores, which will adversely impact the financial performance of the Company. Overall, the Group stays encouraged by decent revenue growth in financials. The stock made a 52-week low and high of GBX 101.00 and GBX 293.80, respectively.

Based on the factors as highlighted above, we believe the stock of Kingfisher is “Expensive” at the closing price of GBX 290.90 (as on 22 September 2020).

Whitbread Plc – Witnessed a strong demand in tourist locations

Whitbread PLC (LON: WTB) is a Dunstable, the United Kingdom-headquartered hotel operator. The Company also owns and operates the Premier Inn business.

On 27 October 2020, the Company will announce the interim results.

Rationale for Valuation – Buy at GBX 2,049

• The Company has decent fundamental metrics as it has maintained a Gross margin above 80% for the last five years.
• On the liquidity front, the current ratio was 1.29x in FY20, which was higher than the industry median. This reflects that the Company has sufficient current assets to pay short-term obligations and robust liquidity profile to tackle the challenging environment.
• UK Restaurant performance was boosted by the positive impact of the EOHO scheme.
• From the technical standpoint, 90-day RSI stood at 43.16, which is supporting the upside movement.

Key Risks

• The UK restaurant sector is currently exposed to a variety of risks ranging from distorted demand for their product, contracting economy, and declining disposable income.
• Whilst the Company is not currently able to assess the full financial impact of COVID-19, it anticipates a significant decline in cashflow and EBITDA in FY20.
• The Company might face a challenge due to changing consumer spending behaviour.

H1 FY21 Post Close Update (as on 22 September 2020)

(Source: Company Website)

• In the first two weeks of September 2020, the Company’s total accommodation sales remained ahead of the market (on a year-on-year basis), with strong bookings in tourist destinations and growing business bookings.
• On a year-on-year basis, the Company’s total sales were down in H1 FY21, due to the closure of the hotels and restaurants.
• Across the entire UK estate, overall occupancy levels improved on a weekly basis, with year-on-year accommodation sales recovering.
• In August 2020, total sales were more than 300% ahead, which was boosted by the acquisition of Foremost hotels.

One Year Share Price Chart

Daily Chart as of 22 September 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

*Peers: InterContinental Hotels Group Plc, GYM Group Plc, Flutter Entertainment Plc, and On the Beach Group Plc.

Conclusion

The Company witnessed strong demand in tourist locations, but market demand remained subdued in metropolitan areas and London. In the medium to long-term, the business is well-placed to take advantage of enhanced structural opportunities and retains a strong balance sheet. One-off costs for the job cuts are expected to be about £12 million to £15 million. The Eat Out to Help Out (EOHO) Scheme is an economic recovery measure by the UK government to support hospitality businesses as they reopen after the COVID-19 lockdown in the country. The stock made a 52-week low and high of GBX 1,551.14 and GBX 4,462.28, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Whitbread at the closing market price of GBX 2,049 (as on 22 September 2020), with lower double-digit upside potential based on 7.00x EV/NTM Sales (approx.) on FY21E sales (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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