Kingfisher's turnaround plan is not convincing, says Numis

Kingfisher has been given a ‘reduce’ rating by Numis after the company's recent full year results.

Numis said it was yet to be convinced that the home improvement retailer’s transformation plan will successfully address the group’s low return on capital employed or develop new growth channels. The broker reiterated its target price of 325p, which compares to the share price of 378p at 1123 BST on Monday.

“Meanwhile, the liquidity profile is less compelling,” said Numis analyst Matthew Taylor.

“We view the valuation as challenging on 16.6 times price-earnings ratio/ 4% free cash flow yield to full year 2016.”

The company, which owns B&Q and Screwfix, last month reported a 0.3% increase in adjusted pre-tax profit to £686m despite a 2.6% drop in adjusted sales to £10.3bn due to foreign exchange headwinds.

Kingfisher said its five-year turnaround plan, announced in January, was on track but warned that profits would be hit in the first two years with a total expected cash cost of £800m. The company expects the plan to deliver a £500m sustainable annual profit uplift by end of year five.

“We remain sceptical that the strategy will eventually achieve £500m per annum of incremental profit and view the implementation costs, notably the £800m cash impairment, as significant,” Taylor said.

However, the analyst said the 2016 full year results slightly beat estimates and Numis has raised its 2017 forecast by 4% due to a more favourable currency backdrop.

The underlying trading picture was said to be "solid enough", while the shares have benefited from the recent weakness in sterling with the 10% fall equivalent to a "circa 5%" upgrade.