A Wickedly Cheap Spin-Off Situation
Excellent analysis. Now before you read the below, let me add this disclaimer: YES I think Wickes is undervalued, but then so is Kingfisher. So they are undervalued on market-wide basis but not on a peer-basis.
Howdens Joinery operates a very different business, so hard to use that as a comparable. Their clients lean more towards builders who know Howden's products, whereas Wickes customers are more DIY. Howden's business model is working well and it shows: they grew revenue at an insane rate last year.
Kingfisher is a better company to use as a comparable, while they also seem undervalued their business is much more similar to Wickes' than compared to Howdens. Wickes is more DIY than "Do it for me". Although Wickes will try and compete in the "Do it for me" market, they won't get far as this is Howden's game completely. Wickes is going to play catch-up.
TPT shouldn't be used as a comparable. B&M also, should not be used as a comparable. Different market. I'm even nervous to use TPK as a comparable because they are a builder's merchant.
So best comparables I can see here are Kingfisher, Howden's. Howden's deserves a better multiple, they have a better more innovative faster growing business...Kingfisher trades relatively the same.
Thorough write up of what seems to be an insanely cheap company 🙏
The big question for me is capital allocation though. Why do they even have so much net cash? Time for some buybacks!
Thanks for the idea... looks very compelling.
I really don't understand why anyone would count store leases as part of net debt. It doesn't make any sense, right?
If EV includes lease liabilities then frankly it should be compared with EBIT pre-rental expenses (roughly GBP 100 million according to the prospectus), i.e. almost GBP 200 million? Then if you own those lease liabilities as well as the equity you'll get almost GBP 200 million per year. Clearly GBP 1 billion in EV is too low to get access such yearly income.
Fantastic! A share repurchase program could serve as a catalyst as well. They should use some cash on the balance sheet and FCF to buy back a ton of very cheap stock.
Nice idea and well explained. I like the fact that is a spinoff but just a question, did you see the opinions in Google about their stores? They are not really positive. What are you're thoughts about it?
Terrific analysis and very thoughtful and reasoned. Thanks for the reassurance as someone who is sitting on a pile of the shares bought just before the recent down tick in the price. I’m happy to look at a 2 year time frame and so will stay in on the basis that sound economic sense will prevail.
Thanks for wour work Connor. It´s an amazing thesis. If I may I would like to ask two questions:
1- The lease liabiities has and incremental of 4% that amount more or les 30m of interests. Do you consider this interests to calculate FCF even though they are not a bank interests?
2-You have an staggering investment level. Where did you learn it? Any book, mentor, course that you did/read/follow that yoy can recommend to me?
Once again, thanks
Superb write-up (and agree with the thesis) - subbed.
A few observations / questions:
1. Agree with the other commenter on comparables although even KF is imperfect as it is c.50% trade/DIFM (think Screwfix, Tradepoint etc.). Interesting to also benchmark against some of the US comps (e.g. Home Depot, Lowe's)
2. 2.3x pre-IFRS 16 EV/EBITDA feels low; does that include (estimated as unlikely disclosed) lease costs in the denominator? As a broad rule of thumb in my experience these kinds of businesses have a lease multiple (IFRS-16 lease liability / IFRS-16 D+I) of 3-4x, and the post-IFRS-16 EV/EBITDA is mathematically somewhere between the pre-IFRS 16 multiple, and the lease multiple (the exact multiple depends on the relative size of the IFRS adjustment vs EV and EBITDA, but those are the bookends). In other words 2.3x pre-IFRS 16 EV/EBITDA would imply a lease multiple of probably well over 5x to get a post IFRS-16 multiple of 4.7x, which feels unusual (but not impossible)
3. Do you use Koyfin for all your data (multiples, consensus etc.)? If so how does it compare to the professional platforms you presumably used in your previous career (CapIQ/Factset etc.)? I have experience with those platforms but Koyfin looks on the face of it good bang for buck - considering trying it out for my own PA use.
4. How do you come up with your names to deep-dive? Some kind of data screening or less scientific than that?
Thanks and look forward to the future instalments.
thanks for your writing. It seems as you mention a Greenblatt's spin off situation. I can t agree completely about your take over target point, as i don´t see a clear path to growth (ie new stores) other than market growth.
I would like to see 2 things: a CEO with more experience in the company more than 10 years (Fraser Longden seems the one who has been with wickes since 2014, the rest seems ad hoc hires) and more share buys by insider.
Another aspect to consider is in the "spin off manual" you usually expect reduction of expections by the management to benefit from the spin off.