Ferguson confirms bumper payout as US market remains strong

The FTSE 100 plumbing products group, formerly known as Wolseley, reported headline EPS up 16.6% to 202.1 cents on profits up 15% to $698m and revenues up 10.3% to $10.03bn in the half year ended 31 January.

Directors pledged to hike the interim dividend 10% to 57.4 cents per share and will at its 23 May annual shareholder meeting propose a special dividend of $4 per share as well as continuing share buybacks. A share consolidation will also be effected.

Chief executive John Martin said the drivers of the first-half performance were good growth and margin progression in the USA where growth came across all geographic regions and business units.

"US residential markets are growing well, commercial market growth is good and industrial markets have recovered. Canadian markets are healthy, though UK markets are challenging," he said.

The USA, which represents 89% of group trading profit, grew revenue 9.1% in the second quarter after the 8.3% in the first, while profit grew 16% to $647m.

The UK saw revenue grow 0.5% and trading profit shrink 14% to $38m. A restructuring plan, which contributed $37m of a $46m pre-tax exceptional charge incurred in the period, was accelerated in the period, with a further 52 branches closed and a significant cut to central support costs.

Organic revenue growth since the end of January has continued in line with the second quarter, but Martin pointed out that comparative figures from the previous year will get progressively tougher to beat through the second half. He said the group was confident it can achieve trading profit "in line with analyst expectations for the full year", with the company-compiled consensus pointing to $1,442m.

The $1bn sale of the Scandinavia focused Stark Group is expected to complete at the end of March, subject to which the board proposed the full sum to shareholders via special dividend, with an accompanying share consolidation.

With net debt of $1.4bn, it is below the target net debt in the range of 1x to 2x EBITDA, consistent with investment grade credit metrics.

Shares in Ferguson rose almost 6% to 5,436p on Tuesday morning.

The special divi should still, in the view of analysts at BoA Merrill Lynch, leave the group "comfortably below 1x net debt to EBITDA, leaving ample firepower for potential M&A".

Merrill said Q2 sales and trading profit were 1% and 2% above its forecast, largely driven by the US organic growth and improvement in trading margin, supported by a combination of strong residential demand and solid cost control.

"We have kept our estimates broadly unchanged, with higher US/Canada estimates offset by lower UK estimates," analysts wrote, expecting consensus to rise by circa 2% at the trading profit level. For the full year, Merrill forecasts EPS of $4.20.

Barclays agreed the second-quarter result was better than expected in terms of both organic revenue growth and margins. "This leads us to upgrade our full year trading profit estimate by 3% and increase our price target to £62, 21% above the current level."

Barclays increase its organic sales growth forecast from 6% to 7% and lifted its margin estimate by 12 basis points to 7.1%, with the trading profit forecast increased 3% to $1,460m for 2018 versus a company-compiled consensus of $1,442m, and by 2% in 2019.

It was a "decent set of reassuring results slightly ahead of expectations", said broker Canaccord Genuity, impressed by the US continuing to trade very well with organic growth accelerating in Q2 and gross margins moving higher, noting the UK was a bit weaker but management continues with its transformation plan in an unchanged market.

"Outlook comments point to continued good trading across all its markets in the US. We would not expect consensus to change significantly, but could edge up slightly on a better US performance. The group is now a purely US business and looks in good shape to benefit from positive US trends and more focus on its key market. A stronger sterling against the US dollar is a bit of a headwind for valuation. Overall valuation looks well supported given trading in the US and the proposed special dividend."