Ferguson PLC

Switzerland-based Ferguson Plc (FERG) is a holding company, which provide the distribution of heating and plumbing products. The group is a specialist distributor and has served more than one million clients who are aided by the group's 35,000 associates. With 19 distribution centres and 2,280 branches spread over three areas, the company intends to bridge the gap between the geographically scattered customers and the large supplier base.

On 3^rd December 2019, the company will announce the Q1 FY2020 Interim Management Statement.

Financial Highlights (for the year ended 31 July 2019, US$ million)

(Source: Company Website)

The company delivered a robust trading result for the financial year 2019. In the United Kingdom, heating and plumbing markets were flat. In Canada, the residential markets stayed tough. In FY19, the company’s statutory revenue increased by 6.1 per cent to $22,010 million as compared with the financial year 2018 of $20,752 million. Statutory profit before tax, after exceptional changes, increased to $1,324 million against $1,187 million in FY18. In FY19, the statutory profit attributable to shareholders reduced to $1,108 million against the $1,267 million in FY18. Statutory basic earnings per share stood at 481.3 cents.

On an alternative performance measures basis, the ongoing revenue stood at $21,771 million, up by 4.4 per cent on an organic basis and 7.9 per cent ahead at constant exchange rates. The ongoing trading profit stood at $1,601 million, up by 7.5 per cent from the previous year at constant exchange rates. Headline earnings per share increased by 16.4 per cent to 517.4 cents as compared to 444.4 cents in FY18. Net Debt to adjusted EBITDA stood at 0.7x in the financial year 2019.

The company was proposing a final dividend per share of 145.1 cents which brings the total dividend per share to 208.2 cents, an increase of 10 per cent from the last year.

Share Price Performance
 
Daily Chart as at October-01-19, after the market closed (Source: Thomson Reuters)

On 1st October 2019, Ferguson PLC shares closed GBX 6,186, up by 4.071% against the previous day closing price. Stock's 52 weeks High and Low are GBX 6,450/GBX 4,594. The company’s stock beta was 0.86, reflecting the lower movement of the stock as compared to the benchmark index.

Conclusion
The company has shown decent financial performance in the financial year 2019. The company’s revenue from its US and Canada business has increased, but its revenue from the UK business has declined. The company operates in several locations and any shift in the political and economic policy can hinder the group’s operating performance. In the upcoming year, the group’s Board expects to make additional good progress. The business is well positioned with decent order book strength. The company stay focused on maximising the gross margin expansion, strong cash generation, organic revenue growth rate, and tight cost control.

Based on the decent fundamental performance and risk associated, we have given a “HOLD” recommendation at the closing price of GBX 6,186 (as on 1^st October 2019).
 

Greggs PLC

Greggs Plc (GRG) is a bakery chain operator, grounded in the United Kingdom. The company’s product portfolio comprises of sandwiches, pasta, salads and soup, bread and rolls, platters, cakes and buns, muffins, doughnuts, and biscuits and bakes. Greggs offers these products, with lower fat, calorie and salt contents that provide a healthy diet and nutritional values to its customers. It conducts business operations through its retail shops and bakeries.

On 8^th January 2020, the company will announce the Q4 FY19 Trading Update.

Q3 FY19 Trading Update (as on 1^st October 2019)
In Q3 FY19, the company continued to trade very strongly. Total sales increased by 12.4% in the 13 weeks to 28 September 2019. In company-managed shops, the like-for-like (LfL) sales rose by 7.4%.  In the nine months to 28 September 2019, the total sales surged by 13.9%, and LfL sales surged by 9.4%. In the year to 28 September 2019, 56 net new shops were opened, total of 90 new shops opened and closed 34 shops. On 28^th September 2019, the company now has a total of 2,009 shops trading, comprising 1,724 company-managed shops and 285 franchised units primarily in transport locations. In August 2019, the company passed the 2,000-shop landmark with the starting of the new shop at South Shields Interchange.  For the year, the company estimated to open 90 net shops, of which about 40 are projected to be with franchise partners.

Financial Highlights (for the 26 weeks ended 29 June 2019, £’000)

(Source: Interim Report, Company Website)

In the first half of the financial year 2019, the company’s reported revenue increased by 14.7 per cent to £546 millionas compared with the corresponding period of the last year. Underlying pre-tax profit margin increased to 7.5 per cent against the 5.4 per cent in H1 FY2018, due to an increase in sales and operational cost control. The company’s underlying basic earnings per share stood at 32.2 pence in H1 FY2019 versus 20.4 pence in H1 FY2018. Ordinary interim dividend per share increased by 11.2 per cent to 11.9 pence in line with the policy of paying one-third of the prior year's total dividend as an interim dividend. The Board declared the special dividend per share of 35 pence.

Share Price Performance
 
Daily Chart as at October-01-19, after the market closed (Source: Thomson Reuters)

On 1st October 2019, Greggs PLC shares closed GBX 1,828, down by 12.536% against the previous day closing price. Stock's 52 weeks High and Low are GBX 2,453.99/GBX 986.12. The company’s stock beta was 0.74, reflecting the lower movement of the stock as compared to the benchmark index.

Valuation Methodology

*Peers: Young & Co’s Brewery PLC, Compass PLC, Dominos Pizza Group PLC, Fuller Smith & Turner PLC, and City Pub Group PLC.

Conclusion
Since the company is in the development phase, it is opening new stores.The UK food-on-the-go market is already highly competitive, and if other players were to become more aggressive, this could affect Greggs’ ability to attract customers. Failure to achieve the anticipated cost-saving measures or difficulties in implementing supply chain investment could result in a greater impact on margins. The main challenge for any retail food companies is to preserve its food products from contamination. The economic conditions are going to be challenging for the rest of 2019. However, inflationary pressure has reduced, but confidence levels will continue to remain low over uncertainties regarding the economic conditions. Weather condition is also a critical factor for the group, and dire wintry conditions and elongated heatwaves strongly impacted last year sales. But the company warned that Brexit continued to “present significant uncertainties” and that the bakery chain was building supplies of key ingredients in order to mitigate potential supply chain and exchange rate pressures. With the previous guidance to the end of the year, the overall input cost inflation is in line, with pressures on both labour and food input costs.

Based on the above rationale and valuation done using the above methodology, we have given a "Watch" recommendation at the closing price of GBX 1,828 (as on October 01, 2019), based on the 14.72x NTM Price/Cash Flow (approx.) on the FY19E cash flow per share (approx.), while we look for any upcoming catalysts.
 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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