Ferguson PLC

Ferguson PLC (FERG) is a Wokingham, United Kingdom-headquartered specialist distributor of plumbing and heating products which has operations in the USA, UK, Canada and Central Europe, with over 1 million customers served by 35,000 associates in 2,259 locations. The company aims to bridge the gap between the large supplier base and geographically dispersed professional customers, and principally serve the Repair, Maintenance and Improvement (RMI) markets and hold leading positions in many of these markets. The operations of the group are differentiated based on its geographical presence.

Financial Highlights (FY 2019, in $m)
 
(Source: Company Filings)

Ongoing revenue during the period was $21,771 million(2018: $20,334 million), which was 7.9% ahead at constant exchange rates and 4.4% ahead on an organic basis, while statutory revenue, which included revenue of $239 million for businesses sold during the period, was $22,010 million (2018: $20,752 million), which was 6.1% ahead of last year. Statutory gross profit rose to $6,458 million during the period from $6,044 million, while as a result of disciplined pricing controls combined with the favourable impact of acquisitions, ongoing gross margins of 29.4% (2018: 29.3%) were 0.1% ahead of last year. Ongoing trading profit was $1,601 million (2018: $1,493 million), which was 7.5% ahead of last year at constant exchange rates, while statutory operating profit was reported at $1,402 million against $1,360 million in FY 2018 and operating profit after exceptional charges was $1,496 million versus $1,442 million in the prior year. Profit attributable to shareholders was lower at $1,108 million (2018: $1,267 million), while statutory profit before tax was $1,324 million (2018: $1,187 million) after exceptional charges. Reflecting the increase in trading profit during the year and a reduction in the effective tax rate, headline earnings per share increased by 16.4% to 517.4 cents (2018: 444.4 cents) and total basic earnings per share were 481.3 cents (2018: 515.7 cents).

Valuation Methodology
Method:  Price/Earnings Approach (NTM)


Share Price Commentary

Daily Chart as at 25-October-19, before the market closed (Source: Thomson Reuters)

On 25 October 2019, at the time of writing (at 10:44 am GMT, before the market closed), FERG shares were trading at GBX 6,494, down by 0.06 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 6,536.00/GBX 4,594.00. The company's stock beta was 0.85,reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £14.85 billion, with a dividend yield of 2.61 per cent.

Conclusion
The arrival of new competitors with new technologies has started to grab market share. Lower-cost transactional business models have disrupted the wholesale and distribution businesses. As the US market growth moderated in the second half and withdrawal of the UK from the European Union continues to create a level of uncertainty affecting the UK economy, the group is exposed to short-term macroeconomic conditions and market cycles in the sector, which can impact the ability to maintain the attractive profit margins.

Based on the headwinds faced by the group, we have given a "SELL" recommendation at the current price of GBX 6,524 (as on 25 October 2019, before the market closed), based on 14.83x NTM Price/Earnings (approx.) on FY19E Earnings (approx.).
*Peers of the company are Compagnie de Saint Gobain SA, Travis Perkins PLC, SIG PLC and Kingspan Group PLC.
*All forecasted figures and peers have been taken from Thomson Reuters.

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