Generally, the investors are interested in making a diversified investment, as investing across sectors, geographies, multiple assets, and classes help an investor to manage the risks effectively. It helps to narrow down several of outcomes between anticipated and best-obtained return. Also, it helps in decreasing the dependency of a stockholder on any one investment. Here we are discussing two stocks from different sectors.
Stock comparison of Ferguson PLC and Redrow PLC(Source: Thomson Reuters)
Ferguson Plc (FERG) is a Switzerland-based holding company, specialising in the distribution of plumbing and heating products and is headquartered in Zug, Switzerland. With 2,280 branches spread across three regions with 19 distribution centres, the company aims to bridge the gap between the large supplier base and geographically scattered customers through its 5,900 strong fleet vehicles. The group is a specialist distributor and has served over 1 million customers who are assisted by the company's 35,000 associates.
Proposed Demerger of Wolseley United Kingdom, Listing Structure and CEO Succession
On 3rd September 2019, the group’s board announced that it would demerge its United Kingdom operations. On the accomplishment of the transaction, Wolseley United Kingdom will turn out to be an independent listed business serving commercial and residential trades people and clients. The separation will additionally simplify the company and will permit the Wolseley United Kingdom to emphasis wholly on clients in the United Kingdom market. Following the demerger, the company will be exclusively attentive to serving clients in North America.
The company’s CEO, John Martin, said that the demerger would permit both Ferguson and Wolseley UK to emphasis on accelerating the implementation of their independent plans, offering clear investment propositions for each commercial. The Wolseley United Kingdom has a robust market position, a skilled management team, and leading client propositions, through substantial prospects for expansion in the huge and fragmented plumbing, heating and infrastructure markets. The company will continue to implement its successful strategy, market outperformance, generating attractive returns for shareholders, and building on a robust track record of profitable growth.
The company on the same date announced that the group CEO, John Martin, will step down on 19th November 2019. The company has been significantly strengthened and simplified in his tenure, substantially improving its excellent returns and market positions for shareholders. The company’s board said that Kevin Murphy would take the place of John Martin as Group CEO.
Financial Highlights (Q3 FY2019, US$ million)
(Source: Quarterly Report, Company Website)
In the third quarter of the financial year 2019, the company’s reported revenue increased by 6.2 per cent to $5,274 million versus $4,968 million of the last year for the same period. On an organic basis, the revenue surged by 2.7 per cent. The increase in revenue was due to an increase in revenue from the company’s US business which was up by 8.4 per cent. The company’s gross margin increased by 20 basis points to 29.5 per cent. The company’s trading profit increased by 2.3 per cent to $359 million in Q3 FY2019 against $351 million in Q3 FY2018. The company remained highly cash generative with $632 million in the third quarter of the financial year 2019 with 0.9x of net debt to EBITDA. The company announced a share buyback of $500 million.
The company will keep on investing organically in the businesses augmented by bolt‐on acquisitions in the main operations. The company had robust financial performance in line with the capital allocation policy. The company is initiating a share buyback programme of US$500 million, which they anticipate completing over the next twelve months.
The market environment in which company operate has low growth potential which can impact on company’s profitability. Also, the company operates in multiple locations and any change in the economic and political policy can hamper the company’s operating performance.
Share Price PerformanceDaily Chart as at September-12-19, before the market close (Source: Thomson Reuters)
On September 12, 2019, at the time of writing (before the market close, at 11:00 AM GMT), Ferguson PLC shares were trading at GBX 6,248, down by 0.414 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 6,601.91/GBX 4,594. At the time of writing, the share was trading 5.36 per cent lower than its 52w High and 36 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 554,321.20; 30 days – 549,329.17 and 90 days – 613,474.32. The average traded volume for 5 days was up by 0.91 per cent as compared to 30 days average traded volume. The company’s stock beta was 0.89, reflecting low volatility as compared to the benchmark index. The outstanding market capitalisation was around £14.38 billion, with a dividend yield of 2.40 per cent.
Redrow Plc (RDW) is a prominent name in the residential housing development. The group is involved in constructing homes throughout Wales and England. Its operations are mainly focused on housebuilding. The company’s product range is mainly targeted to traditional family housing in its apartment schemes and regional businesses in Greater London. The group's array of properties contains Regent Collection, Heritage Collection, Bespoke Collection, and Abode Collection. The group's subsidiaries comprise of Redrow Real Estate Limited, HB (HDG) Limited, Harrow Estates Plc, and Redrow Regeneration Plc.
Reason for Success in 2020
(Source: Annual Report, Company Website)
Based upon trading over recent weeks, the company has several reasons to be confident that the financial year 2020 will be another fruitful year for the group as driven by EPS which is expected to increase to 99.7 pence, DPS to surge to 32 pence, revenue to go up to £2.2 billion, sales outlets are likely to increase to 135 outlets, ROCE (return on capital employed) to be more than 25 per cent. It also expects to maintain land holdings at 4 years, waste diverted from landfill to be less than 95 per cent, HBF (Home Builders Federation) 90 per cent customer recommended rating, maintain an appropriate balance in availability of product in the right areas, maintain level of trainees at 15 per cent of an increasing workforce, and accident incident rate to be maintained at 0.3 or below.
Financial Highlights (FY2019, £ million)
(Source: Annual Report, Company Website)
In FY2019, the company’s reported revenue surged by 10 per cent to £2.1 billion as compared to £1.9 billion in FY18, with homes revenue rising by 10 per cent to £2.1 billion (FY18: £1.9bn) and other revenue from land sales was £21 million and also in line with the previous year (FY18: £20 million). Gross margin decreased by 50 basis point to 23.9 per cent against the £24.4 per cent in FY18, driven by the change in tenure mix of the residential housing turnover with Homes revenue coming from Affordable Homes of 12 per cent as compared to 7.5 per cent in the previous year.
In the financial year 2019, operating margin was 19.5 per cent, a decrease from the prior year (FY18: 19.9 per cent). The company delivered a record profit before tax of £406 million, an increase from the last year (FY18: £380 million), due to an increase of 6,443 new homes. For the year 2019, basic earnings per share climbed by 8 per cent at 92.3 pence as compared with the financial year 2018 of 85.3 pence.
In FY19, the return on capital employed stood at 28.5 per cent and remained the same as of the last year. Return on equity decreased to 26.5 per cent in FY19 from 28 per cent in FY18. The gross investment in land surged by £76 million or 5 per cent in the year 2019 to £1,515 million, reflecting the continued achievement in securing sites to utilise the product best. The cash inflow generated from operations stood at £371 million (FY18: £276 million). The net cash balance surged to £124 million at the end of June 2019 from £63 million at the end of June 2018.
The group’s board proposed a final dividend per share of 20.5 pence in 2019 which will be paid on 13th November 2019 to investors on the registration date on 20th September 2019. This was an increase of 8 per cent from the last years’ final dividend. Therefore, the full-year dividend per share was 30.5 pence, an increase of 9 per cent from the 28 pence in FY18.
Since the start of the financial year 2020, trading has been encouraging, and the demand for the homes is robust through reservations running ahead of the previous year. Moreover, the company has exchanged contracts for an additional PRS (Private Rented Sector) scheme at Colindale Gardens, adding 347 plots to an already significant order book.
From the perspective of the market, the new homes remain resilient in spite of economic and political uncertainty. There remains robust demand for a quality product which remains to be maintained by low-interest rates. The company is well-positioned for the future with a robust order book, an outstanding product and a dedicated team to deliver.
The suppliers have increased stocks of imported goods and put in place strategies to source materials from alternative suppliers. The company has a decent balance sheet, helping it to remain agile and respond swiftly to new opportunities. Continued availability of Help-to-Buy, good access to affordable mortgage finance and high employment supports strong demand for affordable homes, as the latest UK housing market remains positive.
Share Price Performance
Daily Chart as at September-12-19, before the market close (Source: Thomson Reuters)
On September 12, 2019, at the time of writing (before the market close, at 11:15 AM GMT), Redrow PLC shares were trading at GBX 608, flat against the previous day closing price. Stock's 52 weeks High and Low are GBX 643.82/GBX 455.32. At the time of writing, the share was trading 5.56 per cent lower than its 52w High and 33.53 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 1,195,804.00; 30 days - 752,126.67 and 90 days - 765,774.50. The average traded volume for 5 days was up by 58.99 per cent as compared to 30 days average traded volume. The company’s stock beta was 0.91, reflecting low volatility as compared to the benchmark index. The outstanding market capitalisation was around £2.14 billion, with a dividend yield of 5.10 per cent.
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