Better Homes, Better Lives and Bellway.

Continuing the recent housing and property theme that I have been exploring. Yesterday we had results from Kingfisher (KGF) - Europe's leading home improvement retail group and the third largest in the world, with 1,124 stores in nine countries in Europe and Asia. Its main retail brands are B&Q, Castorama, Brico Dépôt and Screwfix. They also operate the Koçtaş brand, a 50% joint venture in Turkey with the Koç Group. B&Q is a strong brand with the market leading position in the attractive UK home improvement market. Despite a very challenging housing and economic backdrop for the last six years, during which its market declined around 12%, Kingfisher UK & Ireland delivered broadly flat sales and achieved profit growth of 50% by exploiting the UK trade market opportunity, delivering a number of self-help initiatives whilst continuing to invest in B&Q's stores and infrastructure. 

This one therefore seemed like a good way to play the nascent housing recovery in the UK that was starting to appear, although the UK is only around 40% of turnover. France, which has seen even harder economic times, is around 40% of sales but does make margins closer to 9% versus 5% in the UK. Contributions from other overseas territories are fairly negligible except for Poland which is around 10% of turnover and makes 11% operating margins. Perhaps because all the Polish builders are over here they have to do their own DIY there?

Any way I bought it early this year as I had reduced my successful N.Brown (BWNG) holdings and wanted to diversify my retail holdings. I had Identified on the chart and valuation grounds that around 350 to 360 pence was a reasonable entry point and I targeted this since last summer. Thus when a price alert was triggered with the shares having come back from over 400 pence I was happy to put some in my trolley. 

So to the results saw turnover come in slightly ahead of forecasts at £1125 million +5.2% in total (+0.7% LFL in constant currencies) v £1107 million forecast. Earnings were slightly ahead of forecast at 23.4 pence +4.9% v 22.9 pence (F), while the dividend was slightly behind forecasts of 10.1 pence at 9.9 pence +4.7%, although they did talk about a multi-year programme of additional capital returns to shareholders, starting with around £200 million during the financial year 2014/15. They say that the timing and mechanism for this capital return will be kept under review to ensure we maximise value creation for our shareholders and that updates will be given with interim and full year results. This was probably prompted by the fact that their net cash rose to £238 million. It does however have a Pension deficit of around £100m which could be counted as debt and netted off against this cash. In addition, like most retailers, the Group's overall leverage is more significant when including capitalised lease debt that in accordance with accounting standards does not appear on the balance sheet. The ratio of the Group's lease adjusted net debt (capitalising leases at 8 times annual rent) to EBITDAR is 2.3 times as at the year end. At this level they claim the Group has financial flexibility whilst retaining an efficient cost of capital. 

I like their capital disciplines as evidenced by the proposed return of £200 million capital this year and their concept of Kingfisher Economic Profit (KEP) as a main measure of return on capital. It is used in their capital investment process, to assess performance and drive returns in strategic plans. KEP is derived from the concept of Economic Value Added representing earnings after a charge for the annual cost of capital employed in the business. Earnings are defined as adjusted post-tax profit, excluding interest, property lease costs and exceptional items. A charge is then deducted by applying the weighted average cost of capital (WACC) to capital employed. For the purposes of consistency both WACC and capital employed are lease adjusted. Leases are capitalised based on an estimate of their long-term property yields. In order to focus on controllable factors both WACC and long term property yields are based on those in place when KEP was introduced.  

Going forward, they continues to aim to move towards a medium term annual dividend cover of around 2.5 times. At this level, the Board believes the dividend will continue to be prudently covered by earnings and free cash flow and remain consistent with the capital needs of the business. So given cover is around 2.4x this year dividends should grow roughly in line with earnings from here. With double digits growth being forecast and recovering housing and construction markets I'll probably run with this one for now given a fair looking 15x PE or so and despite the relatively low prospective yield of about 2.6% after the 5%+ rise in the share price on the back of the results.

Meanwhile today to confirm the strong trend in ugly boxes - no sorry new house building from the second half of last year we have had first half results to 31st January 2014 from the national house builder Bellway (BWY). These read pretty well and demonstrate the benefits from the recovering demand for new houses. From the statement the Operational highlights were:

§ 3,245 homes sold (2013 - 2,597) - up 25.0%

§ Average selling price increased to £212,071 (2013 - £187,426) - up 13.1%

§ 2 new divisions opened with effect from 1 August 2013

§ £240 million spent on land with net investment in land holdings increasing to £1,026.8 million (31 July 2013 - £907.3 million)

§ Total owned and controlled land bank increased to 34,057 plots (31 July 2013 - 32,991 plots)

§ Low net bank debt of only £16.4 million provides Bellway with significant balance sheet capacity for further land investment

§ Forward order book at 9 March 2014 significantly ahead at £829.5 million (10 March 2013 - £507.4 million) - up 63.5%.

Commenting on the results, Chairman, John Watson, said:
"Bellway has made significant progress in the six months ended 31 January 2014, with a 74.9% rise in earnings per share to 66.3p and a 660 bps increase in return on capital employed to 17.1%.  These substantial improvements have been driven by growth in volume, average selling price and operating margin.

Strategy
"The Group's operational and balance sheet capacity for volume growth has allowed Bellway to respond positively to strong consumer demand.  The resulting growth in earnings, together with a strong focus on increasing return on capital employed, has allowed the Group to enhance the total return to shareholders through growth in the net asset value, together with the payment of a regular and progressive dividend.

Dividend
"Given the extent of earnings growth in the period, I am pleased to announce a 77.8% increase in the interim dividend to 16.0p per ordinary share (2013 - 9.0p).

"The Board expects to maintain a full year dividend cover of around 3 times, thereby ensuring a sustainable balance between further capital growth and certainty of return to shareholders.

This leaves this one on 12 month forward numbers of around 10x with a 3% yield which seems fair enough so happy to stay with this one too for now as it has improving metrics and momentum and is another one to play the government backed sub prime warp / house building boom again - so much for re-balancing the economy.

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