Only a minority of FTSE-listed companies with substantial overseas revenues, like Wolseley, have outperformed
At first glance, it’s like struggling to sell water in the Sahara. Or not offloading a stock of woolly jumpers to summer tourists in Scotland . . . with a free pair of gloves. Or being left with unsold copies of German for Beginners at the Department for Exiting the EU’s book sale. Yet it would appear that Wolseley, the world’s number one distributor of heating and hot water products, has genuinely not been able to make much money in Nordic countries.
In fairness to Wolseley, this is not a reflection on product quality so much as product range. Its Nordics business is the only one it has that sells housebuilding materials rather than plumbing and heating parts. Chief executive John Martin notes that Wolseley’s hot water pipes sell better than ice to Eskimos in other parts of the Arctic Circle, such as Canada.
However, with half-year profit in the Nordics down 39 per cent to just £6m, Wolseley has decided to exit the region altogether and rename itself after its US operation, Ferguson, which brings in 84 per cent of trading profit.
This strategy makes sense — and raises two questions for investors.
Selling fork handles to Finns was never going to generate synergies with bigger divisions selling heating kit on an industrial scale. A Nordic disposal will therefore provide funds that can be reinvested in more profitable growth, given net debt is a manageable 1.1 times earnings. It will also ensure a Swedish impairment charge that cut half-year pre-tax profit by 11 per cent to £328m is a one-off.
But given Ferguson’s dominance — it is the market leader in US heating supply with a 17 per cent share, almost three times that of its nearest competitor — is the UK operation now looking a bit too chilly? Almost Scandinavian? While Mr Martin quotes an 8 per cent return on sales in the US, he admits the UK figure is rather lower, if not as a bad as the Nordics’ 3 per cent. For now, the plan is to simplify the UK business under a retained Wolseley brand, optimising the branch network and the logistics.
Even if UK returns improve, though, how long before Ferguson plc accepts that it is essentially a US and Canadian company — and opts for a full US stock market listing? While such a move would require the approval of 75 per cent of shareholders, and at least half on the register are currently outside the US, there is an obvious incentive. Analysts at Canaccord Genuity calculate that a US listing for the shares would result in a re-rating in line with US peers, which trade at a significant price/earnings premium to Ferguson/Wolseley. And that is an easy sell, from the Sahara to Scotland to SW1.
Ladbrokes’ 64k question
Profiles of Jim Mullen, the jovial Glaswegian boss of bookmaker Ladbrokes Coral, often attribute his career path to a childhood calculating betting winnings with grandparents. But another early influence may have more bearing: programming 64-kilobyte home computers in the 1980s. It led Mr Mullen to train as software engineer — a discipline that has served him well, in running online businesses for William Hill, and now combining Ladbrokes with Coral.
Quite how well became clear on Tuesday: the merged group increased its 2019 annual cost synergy target from £65m to £100m. UBS analysts plugged this into their computers and got a 6-12 per cent increase in operating profit for the next 3 years.
However, a far bigger variable must now be factored in to the program: the maximum stake allowed by fixed odds betting terminals in bookmakers’ shops. This is about to be decided by a government review. And it matters because FOBTs — to campaigners’ horror — let punters bet £100 every 20 seconds, and help Ladbrokes bring in £800m a year, when all types of machine are counted.
Changing one variable could make a big difference. Industry-wide estimates suggest a £50 maximum stake would result in 280 shops being lost, and a £2 stake would see another 3,000 shops and £1bn in tax disappear.
But the big variable is how much of this is priced in to Ladbrokes shares. UBS programmers believe a decision to cut FOBT stakes to £10-£15 is already reflected in the price, given its fall from a merged 150p to nearer 120p. For Ladbrokes investors, then, everything now depends on whether a government with £1bn in play can afford to up — or down — the ante. Boot up the Commodore 64!
Home time for Redrow
Now that Redrow has given up pursuing Bovis Homes, Galliford Try is the sole potential bidder, and Bovis shareholders must ponder the time value of money. What is worth more? The present value of a higher Galliford all-share offer? Or the future value of a turned-round Bovis, discounted by an interest rate over the three months to hire a new CEO, a six-month notice period, and two years to put a turnround plan in place. In other words, is Galliford PV>Bovis FV/(1+i)n+hire+notice+plan?