Liberum upgrades Wolseley to 'buy' from 'hold'

Liberum upgraded heating and plumbing products distributor Wolseley to ‘buy’ from ‘hold’ and bumped up the price target to 5,300p from 4,975p.

The brokerage said Wolseley is becoming more refined as it reduces European exposure, exiting Nordics in full and Switzerland in part, taking US profits to 90% of the group.

“US growth is likely to step up as headwinds fade. It is likely to restart capital returns with the proceeds of the Nordics sale,” it said, adding that US business Ferguson's bigger share of the group should drive re-rating.

Liberum pointed out that Ferguson continues to outperform. It is still the undisputed market leader, has a long track record of market share gains through distribution centres, and is building on this by moving into adjacent categories and exploiting e-commerce.

In addition, it highlighted a broadly positive US outlook, with fundamental drivers intact. The US peer group is seeing improving trading, Liberum said, with reports from peers reminding it that Ferguson tends to outperform its peers, and that trading has recently been strengthening.

“This bodes well for the Q3 update, expected on 20 June.”

Meanwhile, the UK restructuring is ongoing in response to the challenging plumbing & heating market, while management has put the Nordic activities up for sale, and pooled its Swiss subsidiary, Tobler, with listed Walter Meier, keeping a 39% stake in the enlarged business.

Liberum also noted the company’s strong balance sheet. “Surplus capital has been redistributed as Wolseley has a strong balance sheet, and we expect this to continue. Successfully selling the Nordic businesses should leave it ungeared at the end of 2018, in our view.”

At 0955 BST, the shares were up 0.6% to 4,789p.