Kingfisher Plc. is a compelling ‘Buy’ at the current price as the stock is pretty undervalued. The company announced its financial year 2016-17 full year financial results last week on 22nd March. However, it seems that the results failed to cheer the investors as the stock opened gap down the same day and continued to fall! The stock finished trading on the London Stock exchange at 324.4p on 28th March, down by 0.25% compared to the previous close. Currently, the stock has been trading below its 20 day moving average (DMA), 50 DMA and 100 DMA of 334p, 332p and 342p respectively. Clearly the stock has been in the bearish trend for quite some time. However, it seems that the stock is done with its correction and is ready to consolidate now at the current levels. The stock is having a very crucial support at 321p, any breakdown below 321p would means further downside and would also indicate that there is still some more room for correction. Therefore, traders or investors shall not hold their long positions, if at all the stock goes below 320p. The moving averages would act as a strong resistance for the stock. However, we see short term upside up to 337p in a span of 15 days to 1 month. In case, the stock pierces 337p then next target would be 350p. Also, to confirm the bull trend the stock needs to cross 332p, so traders are advised to initiate fresh longs only if the stock goes above 332p. The long term view of the stock remains bullish only as the company has strong fundamentals and financial matrix.
Now let’s throw light on the latest financial results of the company. The company’s total adjusted sales in constant currencies are up by 1.7%. The company reported FY’17 underlying pretax profit at £787m, up by 14% mainly driven by UK and Poland LFL sales growth and favorable FX movements on the translation of non-sterling retail profits. The company has also returned £430m of cash to shareholders, £230m via ordinary dividend and £200m via share buyback. As previously announced, Kingfisher disposed of a controlling 70% stake in B&Q China on 30 April 2015. On 23 March 2016 Kingfisher exercised its option to dispose of the remaining 30% economic interest, with the agreement of Wumei Holdings Inc.
As per the management, it has been a productive year for the company which has again delivered sales and profit growth. However, the management’s outlook for France is still cautious because of uncertainty of EU referendum, especially in light of the forthcoming presidential elections.
Based on the above discussion, the management guidance and our own estimates, we estimate Kingfisher Plc. 2018 revenue will be £11.674 billion (£11.225 billion for fiscal 2017) and the operating profit will be £700 million (2017 operating profit was £750 million).Our estimates are conservative and assume 4% year-over-year growth in sales and a margin for earnings before interest and taxes (EBIT) of 6.0%. In the past fiscal years also, operating profit margin on the topline has been in a range of 6%-6.5%. Please find below the earnings outlook of fiscal 2018:
From 2014 through 2016, Kingfisher Plc. has traded at an average enterprise value by EBITDA multiple of 8.6x. That assumes a multiple of 8.5x to calculate the target price. Based on this ratio and on estimated 2018 EBITDA, the stock price target is 408 pence. The calculations are shown in the table below:
We set ‘Buy’ recommendation on Kingfisher Plc with 3 months to 6 months target price of 408p.