Ferguson Plc - Operating in a challenging environment

Wokingham, United Kingdom-based Ferguson PLC (LON: FERG) is a specialist distributor of plumbing and heating products which has operations in the USA, UK, Canada and Central Europe.

On 16 March 2021, the Company will publish the FY21 half-year results.

Rationale for Valuation – Expensive at GBX 8,592.00

• On leverage front, the debt-equity ratio stood at 1.03x in FY20, which was higher as compared to the industry median of 0.61x, reflecting that the Company is highly leveraged as compared to the industry.
• The Company is trading near a 52-week high, and Price/Earnings, EV/EBITDA and Price/Cash Flow multiples are significantly higher as compared to corresponding multiples of the Homebuilding & Construction Supplies industry, reflecting overstretched valuations.
• In FY20, the profitability margins are lower than industry median.
• The operating landscape remains highly volatile with the continuing uncertainty of the COVID-19 pandemic.
• From the technical standpoint, 14-day RSI stood at ~66.49, which means the stock price could decline in the short term.

Key Risks

• The novel COVID-19 pandemic has impacted the global economy, causing massive disruptions in the global supply chain.
• Delays in restoring services following a major disruption could result in a loss of customers and reputational damage.

Trading Update (for the 3 months to 31 October 2020 (Q1 FY21), as on 8 December 2020)

(Source: Company Website)

• The ongoing business revenue increased by 3.1% year-on-year and 3.3% ahead on an organic basis in the first quarter of 2021, with US and Canada ongoing revenue growth of 3.2%.
• Gross margins for Q1 FY20 was down by 0.1% year-on-year, but operating costs continued to be well controlled.
• On 31 October 2020, the net debt stood at US$866 million (excluding leases), with a cash outflow of US$103 million.
• The dividend per share was 208.2 cents, which will be paid on 11 December 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Since the start of Q2 FY21, the Company has continued to generate revenue growth of low single-digit in FY21. While FERG remains cautious on the FY21 outlook, due to the current pandemic trends. However, the business is in very good shape, with a strong balance sheet and good cash generation. The business is more exposed to the economic uncertainties arising from the Covid-19 pandemic. In the future, the Company may face emerging headwinds and cost pressures. Presently, the Group is trading near the 52-week high, raising doubts at the upside potential at the current price level. The stock made a 52-week low and high of GBX 3,700.00 and GBX 8,676.00, respectively.

Based on the factors as highlighted above, we believe the stock of Ferguson is “Expensive” at the current price of GBX 8,592.00 (as on 9 December 2020, before the market close at 8:34 AM GMT), with support from few catalysts needs to be evaluated at a later stage such as decent prospects of London market and improved investors sentiments.

*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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