Wolseley: An Appealing Post-Brexit Play?

4 mins. to read
Wolseley: An Appealing Post-Brexit Play?

Wolseley looks an appealing post Brexit play. Institutions looking for UK stocks in that sector with interests outside the UK will probably increase weightings. The cash and dividend position of the company improved greatly last year. These shares look good value and the technical position appears attractive.            

The Wolseley (LON:WOS) share price fell about 8 per cent in that chill dawn of the triumphant Brexit vote. Now it seems to be bouncing on what looks like a developing support line. That would make sense given the fact that Wolseley has significant business in the US. There we see an economy that is being pulled up by its own American bootstraps, or rather, steadfastly tugged by the fingers of the outgoing Obama administration. In any event, have a look in the direction of the Wolsely chart so that you may judge it for yourself. As I always say on these occasions, chart reading can be a subjective business. I point out, further on, that the most recent consensus estimates for Wolseley look reasonably encouraging

I imagine that its share price would initially have been marked down along with all other UK shares in the usual manner of market wide, general mark downs of the kind we have just seen. Anyway, dearly beloved, we have a UK share that takes us into the hinterland of the US economy with its long established US economic recovery, even if it is a slow one. Moreover, it suddenly looks more attractive than the UK economy, blighted as it now is by major, unquantifiable macroeconomic headwinds. Investors in this UK share will benefit from its direct exposure to US economic activity translated from a now much stronger US dollar into a significantly depreciated pound sterling, thereby enhancing the share’s prospective UK earnings prospects.

Sales revenue growth…

The most recently seen consensus estimates (which I take to have been made prior to the UK Brexit referendum vote last week) includes a strongly growing ‘top line’ of sales revenue, growing earnings per share, and a similarly growing annual dividend. Taking the ‘top line’ sales revenue first, I see that it was worth £13,332 million last year (to July 31st 2015) but is estimated to grow by 7 per cent this year to an estimated and forecast £14,275 million and next year (the one soon about to start) by a further 6 per cent or so to £15,113.

Estimated earnings growth…   

On the back of such an estimated revenue increase, earnings per share are forecast to increase by a near 7 per cent this year, to an estimated 245p and by 11 per cent next year taking earnings per share up to an estimated 272p in the next twelve months.

Estimated dividend growth… 

The amount that the company put aside for total dividends fell last year, from a reported £489 million in the previous year to £324 million. That drop of one third in monies paid by the company to shareholders appears to have been the end of a process and not the continuation of one. That is to say, the most recent consensus of forecast estimates of Wolseley annual dividends includes a forecast 10 per cent increase in the dividend payout for this current year to 31st July 2016 and a further 10/11 per cent next year. That translates into estimated dividend yields of 2.7 per cent or so for the current year, rising to an estimated dividend yield of 2.9 per cent for the year just about to commence, on 1st August.

Cross checking that with the earnings yield (the estimated earnings per share over price per share) we get estimated earnings yields of 6.5 per cent for this current year and 7.2 per cent estimated for next year. That suggests that the company may have increasing scope to decrease the dividend earnings cover from the 2.5 times it was last year.

Improving cash position…

The cash flow of this company certainly improved dramatically last year with operating cash increasing by 51 per cent to cover total investment spending by 1.5 times. This stands in contrast to the previous year, when the operating cash available for the payment of total investment spending and annual dividends was able to only provide half of what was required. So we witnessed a very significant improvement in the situation last year, which should improve again this year, to judge from the much improved estimated earnings and sales figures for this year and next.

In that context, it is worth noting from the reported figures, that although capital spending went up by 15 per cent last year, total investment (of which capital spending is part) actually fell by about a third.

It is also to be noted that cash held as an asset last year rose substantially. Year-end cash in the cash flow account, increased by near half, to a reported £256 million. However, that understates the greatly improved situation. When you take account of the ‘near cash’ items in the balance sheet, liquid assets were stated as £1,105 million – 4.3 times the amount in the cash flow account.

Other encouraging features of last year’s accounting include the news that the enterprise value of the company – that is to say its total balance sheet assets – also grew very nicely last year. Having fallen by around 4 per cent the year before, they recovered by near 11 per cent last year so that the current market capitalisation of £9.3 billion is supported by £7.5 billion of enterprise value and according to last year’s balance sheet, £2.6 billion of net balance sheet assets worth more than an estimated 1,000p a share. Deducting that from the share price to get a “pure” valuation of estimated earnings per share, the prospective estimated PERs on that basis fall to 11 times for this year and 10 times for next year.

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