Investors Chronicle: Kingfisher, PZ Cussons, Alliance Pharma

Buy: Kingfisher (KGF)

Kingfisher has made a strong start to its second half, with sales up by 16.6 per cent in its third quarter to September 19, writes Alex Janiaud.

A DIY craze is afoot. Kingfisher shares gathered pace over the summer as sales surged during lockdown, with the internet sustaining the B&Q owner’s momentum after shops were temporarily closed. The conditions have proved fortunate for Kingfisher, which before the pandemic had already set about stripping back and modernising under the guidance of chief executive Thierry Garnier

Online sales, a key area of focus for Kingfisher, now make up nearly a fifth of overall trading, compared with 7 per cent in the same period last year. B&Q sales edged up 3.7 per cent to £1.84bn, despite group sales bottoming out in April at around three-quarters beneath last year’s comparator. Cost reductions and a tight grip on working capital management helped boost profitability and Kingfisher’s free cash flow, which ballooned by £838m to £1bn. Revisions to supplier terms helped drive a working capital inflow of £656m. New supplier agreements, combined with strong sales in the second quarter, pushed Kingfisher’s inventories down by £300m.

Kingfisher is “still too complex”, the company says. Coronavirus hastened the launch of a new B&Q delivery service from stores, which accounted for more than half of the brand’s home deliveries. Home delivery and click and collect are playing a more prominent role in other parts of the business, too, including Iberia, where the retailer has reversed its decision to leave the market.

And Kingfisher has also paused and stopped a number of initiatives. Its capital expenditure nearly halved to £87m in response to the crisis, but the retailer has also cut back on reviews of its product ranges and scrapped non-critical IT projects. The group has achieved cost savings through rent renegotiations on seven B&Q stores, which yielded an aggregate net reduction of 20 per cent. In the UK and France, much of Kingfisher’s quarterly up-front rental payments have become monthly.

Consensus estimates are for earnings per share of 20.1p for Jan 2021, falling to 19.8p in full-year 2022.

Buy: PZ Cussons (PZC)

A dividend cut — along with lower debt — should leave the group better placed against an uncertain backdrop, writes Harriet Clarfelt.

PZ Cussons full-year results to May reflected a number of tensions at play.

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Before the pandemic, the group’s UK personal care business had been knocked by a Brexit-induced decline in consumer confidence. But the final leg of the reporting period saw a surge in demand for its Carex soap products, as the global health crisis took hold – with customers leaning towards “tried and trusted” names.

Still, simultaneously, the Covid-19 outbreak dampened PZ’s beauty-related sales. And further afield, the virus exacerbated ongoing economic difficulties in Nigeria — where falling oil prices added weight to the blow.

That mixed bag of circumstances knocked adjusted operating profits by 16 per cent to £66.1m. Statutory pre-tax profits tumbled by a third – hit by impairment charges on the five:am yoghurt brand and Rafferty’s Garden baby food, as the group acknowledged a more negative outlook and macroeconomic assumptions.

It was, thus, encouraging to see that the new trading period has started well. First-quarter revenues soared by more than a fifth, underpinned by the group’s “focus brands” portfolio. Even so, recently-appointed chief executive Jonathan Myers pointed to “highly volatile” conditions, with many of PZ’s markets entering recessionary territory. Some challenges are anticipated for the rest of the year.

Shore Capital expects adjusted pre-tax profits of £62.6m and earnings perf share of 12.3p in full-year 2021.

Hold: Alliance Pharma (APH)

The group’s cash position has risen from £18m on December 31 to £20.5m, and net debt has contracted by £7m to £52.2m, writes Harriet Clarfelt.

It was a tale of two revenue streams for Alliance Pharma in the first half, with the group’s new portfolio structure outlining the diverging fortunes of its individual businesses during the pandemic.

On the one hand, consumer healthcare brands — which include Alliance’s “international star” lines — slipped by just 3 per cent to £43.8m, notwithstanding the ongoing crisis. On the other, the smaller prescription medicines segment was knocked by a well-documented slowdown in routine healthcare. Sales here tumbled by 15 per cent to £21.5m.

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Within the consumer division, the Kelo-cote scar treatment performed well — with revenues up by 8 per cent year on year as Chinese demand rebounded during the second quarter. Sales of Nizoral anti-dandruff shampoo were also flat year on year, and Vamousse headlice products saw revenues edge up by 4 per cent to £3.2m. That said, with many US schools not due to open until next year, Alliance believes that second-half sales here will be significantly lower.

As part of its reorganisation, Alliance has given finite “useful lives” to its prescription brand assets of up to 20 years — consequently incurring amortisation charges. Combined with £12.1m in impairment charges against certain prescription medicine assets, this dealt a considerable blow to statutory earnings.

Numis expects adjusted earnings per share of 4.8p in 2020, rising to 5.4p in 2021.

Chris Dillow: Stable inflation

Although the economy faces countless problems, there’s one it doesn’t have — inflation. Last week’s numbers showed that CPI inflation fell to just 0.2 per cent in August.

Granted, some of this was due to the Eat Out to Help Out scheme cutting the cost of restaurant meals — something that will be at least partly reversed next month. Nevertheless, there are good reasons to expect inflation to stay low.

One is the international background. Although oil and other commodity prices have recovered from April’s lows they are still well below pre-pandemic levels.

Another is that wages are falling; last week’s figures showed they were 1 per cent down from a year ago. Granted, this is mostly because people are working shorter weeks: the average hours of a full-time worker have dropped from 36.9 per week before the pandemic to 30.8 now. Nevertheless, this could hold down prices simply by forcing consumers to become more price-conscious and so resist price rises.

And then, of course, there’s the fact that unemployment is rising, and likely to do so more when the furlough scheme ends. This will push down inflation both by depressing wage growth and by cutting consumer demand.

Nevertheless, there are some offsetting factors.

Some of these are merely technical. In January, the restoration of VAT on hotels and restaurants will push up inflation. And then next spring, this year’s oil price fall will drop out of the data.

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There might, though, be more fundamental upward pressures. One is that firms facing worsened cashflow will be tempted to raise prices to bring in extra cash, in effect trading off future growth for current revenues. Another is that the patterns of demand and supply are changing. Which means that unemployed workers might not bid down wages much simply because they are unable to take the jobs that are available, at least in the short term.

One big fact, however, tells us not to expect inflation to move very far. It’s simply that, since the early 1990s, it has not been terribly cyclical. At its low point in the 2009 recession it fell to 1.1 per cent — but this was a higher rate that we saw during the better economic times of 2000 or 2015. Indeed, for those of us formed in the 70s and 80s, the salient fact about inflation in the last 25 years has been its stability. This tells us not to expect significant deflation nor a big rise in inflation.

More likely, inflation will stay below its 2 per cent target for a long while.

For savers, this is ambiguous. It’s good news, as it means that our money isn’t being eroded very much by rising prices.

But it has a downside too. With inflation low and likely to remain so, the Bank of England can focus its efforts upon stimulating the economy. That means nominal rates will stay low for a long time. Indeed, futures markets are pricing in negative rates next year and rates of less than 1 per cent until at least 2025. Which probably means that real rates will be negative for many years. If markets are right, then, the pandemic will reinforce the downward trend in rates we’ve seen since the 1990s. 

Chris Dillow is an economics commentator for Investors Chronicle



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