Kingfisher Plc. (LSE:KGF) through it’s wholly-owned subsidiaries supplies home improvement products and services through a network of retail chain stores and other channels online. Located primarily in the UK and continental Europe. Most familiarly Kingfisher operates over 1,100 stores in 10 countries including B&Q, Screw-fix, Castorama, Brico Depot and others.
1. Vigilant Leadership
- Maximum reward – 80% of base salary for top management (reduced from 200%)
- Focus – Long term results and annual strategic milestones.
- Operation – Awards are granted every three years subject to 5 year vesting period.
- Maximum reward – 220% of base salary for CEO and 200% for CFO.
- Focus – Earnings.Per.Share and Return.On.Capital.Employed compounded growth.
2. Long Term Prospects
Kingfisher Plc. being a home improver, has one main influence impacting its industry, which is the sale of homes. Essentially, during every house transaction when one party is preparing to sell and another to buy; some form of home improvement is demanded for each party to make their new home personalised or up to a higher standard.
During 2015 Kingfisher Plc. announced a five-year transformation plan (One Kingfisher Plan) focused on creating a unified, unique and leading home improvement offer. The plan would involve driving the company’s digital capability and optimising operational efficiency. Kingfisher believe their plan will ternate approximately £ 500 Million to sustainable annual profit at the end of the 5 years.
The nature of Kingfisher being a geographically diverse operation, enables greater opportunities to arise in a variety of markets. This further mitigates the risks likely to be imposed by Brexit.
- Digital Tools – Digital tools that will help customers to find great ideas, plan products and search for the right products/tools instantly from the convenience of their home or in-store.
- In-store technology – In-store technology will aid Kingfisher to spend less time on administration, and improve customer satisfaction levels.
The Home improvement industry is highly non-substitutional and therefore technological advancements will not demise the industry.
- Poor Investments – Investments fail to deliver value to the company.
- Poor cost management – Fail to identify and maximise potential cost reductions and efficiency savings.
- Global economic uncertainty – Uncertainty surrounding Brexit (UK) and the wider global economic environment.
- One Kingfisher Plan – Fails to deliver anticipated benefits to significant values.
Solutions to Risks
- Kingfisher continually reviews and assess opportunities for expansion, in terms of both online and bricks and mortar retail, across all of the territories and regions in which they operate.
- As part of the five-year planning process each business reviews its cost base and identifies potential savings which are then monitored as part of the budgeting and forecasting processes.
- The spread of countries within which the company operates aids in the mitigation of this risk.
- Kingfishers leadership team monitors the programme and benefits realisation on a regular basis, ensuring sufficient resources are available to deliver the requirements.
3. Stable and Understandable Business Economics
Understandable Business Economics
Over the past 5 years, the hardware and home improvement industry in the UK has begun to recover from the headwind effects of the economic downturn and reduced consumer confidence (animal spirits). Relative growth in the industry picked back up during 2013-14, predominantly supported by the UK Governments resurgent in the UK housing market. For instance the Help to Buy scheme, which incentivised housing demand and consequently home improvements.
In addition, consistently low unemployment, rising disposable income and higher consumer confidence has contributed to rises in demand. The industry has noticed significant innovation including click & collect mobile applications, which has lessened the importance for location.
Rank In industry
- Largest in Europe
- No.3 globally (behind Home Depot and Lowe’s in America)
Competitive Advantages (MOATS!!!)
- Stickiness – Loyal customers willing to pay premiums for higher quality
- Global strong brand value
- Pricing Power – Developed from cost advantages (economies of scale)
- Non-substitutional products/services
- Cannibal activity since 2011 (Share buybacks) (expected to continue through 2018/19)
Barriers to entry
* Strong existing brands * High entry costs (technology and retail space) * Promotion of eco-friendly products * High market shares * Improved economies of scale * Global diversity
* Hardware, Home improvement and D.I..Y stores across Europe and Asia.
Financing and Capital Structure
Growth Prospects (Long-term)
- Expansion beyond Europe, into America ($ 300 Billion industry) and Africa.
- Innovation of products and technological systems
- Organic acquisitions of smaller companies
- Expansion into other business segments
- One Kingfisher Plan – improved efficiency and focus
From computing a discounted future free cash flow and earnings power model on Kingfisher Plc. and discounting them back to today’s present value using a 6% discount rate and 15% perpetuity rate to be Intrinsically valued between £ 4 – £ 6 per share, equating to £ 9 Billion – £ 13.7 Billion for the entire company. Kingfishers continued heavy share buyback scheme (since 2011 and to continue through 2018/19) was taken into consideration in the indicated intrinsic valuation.
Kingfisher Plc. has a strong and successful track record, which has consisted of turning from an inefficient conglomerate into a profitable and global home improvement retail chain operator. Despite, being one of the largest players in its industry, future growth opportunities are still accessible through sizeable acquisitions made easier by the companies strong cash generation.
Kingfishers new One Plan has been organised to boost efficiency and focus on customer needs, this is anticipated to grow the bottom line substantially over the next 5 years. Concluding, Kingfisher Plc. Is a business that requires little to no debt, has high barriers to entry and a growing global brand loyalty.
See how Kingfisher Plc. performed against the Investment Checklist here.
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Thank you for reading,
Jordonlee W. Smith