Wickes: Building For The Future

8th Feb '23 by Mark Simpson

7 comments 1895 reads

In my last article, I screened for companies with a low Price-to-Sales ratio. The theory is that if such a company can generate even minor improvements in their net margins, this can positively impact profits and drive a re-rating of the stock. My screen contained 48 potential value picks. This week I look at one of them in detail: Wickes (LON:WIX)

Summary

Wickes is a well-run business that reported good trading in its recent Q4 Trading Statement, although in an industry currently facing cost headwinds for 2023.
Its strategy of implementing a seamless digital and physical offering, and greater in-store services, means that it is growing its market share. Particularly amongst tradespeople, for whom the range of products available and rapid click and collect are very desirable.
It trades at a discount to listed peers such as Kingfisher (LON:KGF) and its former parent company Travis Perkins (LON:TPK) . A forward P/E of 9 on depressed earnings makes it look good value.
In this case, the Stockopedia algorithm’s warnings of financial distress look to be misplaced. £166m of cash at the Half-Year and no non-lease debt means they are well positioned to trade through any short-term challenges.

Profile

Wickes is a Main Market-listed home improvement business with an approximately £400m market cap. Many investors will have visited their stores at some point. The company is a relatively recent float, having been demerged from the much larger building merchant, Travis Perkins (LON:TPK) , in April 2021. It has not been all plain sailing for the spun-off business; the shares debuted at 263p and are only around 155p today.

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The company has a Stockrank of 86. But, as you’d expect from a profitable low Price-to-Sales company, the Value Rank stands out at 90:

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The company appears to be highly geared:

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However, looking at the latest accounts, all of the debt is lease liabilities that are counted as such under IFRS16. Excluding lease liabilities, net cash in the first half was £166.5m. Investors will need to make their own minds up about this one. However, from my point of view, net lease liabilities are usually more important than the gross value for making investment decisions.…

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JASVFS

8th Feb '23

Thank you Mark, good analysis. I've used them as a layman and been pleased with their pricing choice and willingness of staff to help. We hold and look to add in the future.

Charles10

Mark, thank you for this comprehensive analysis of the company which I found extremely useful.

Saxonboy57

Thanks Mark. I found this very interesting and educational. I will probably sit this one out, but if the share price falls enough then who knows. As you say, it seems a good well run company with an attractive offering to the trade.

Michael C

Good analysis, thanks.

I bought a full allocation for my income portfolio 4 weeks ago. So far its' been a perfect income investment, there's no reason to doubt the dividends and the shares have gone neither up nor down which removes the temptation to sell!

One of the things you said was 'Although the company provide like-for-like growth rates for the DIY, TradePro and DIFM sales, they don’t give the segmental breakdown of sales or operating profits into these buckets' As a shareholder I'm comfortable with that because I think it's information which might possibly be more useful to competitors than shareholders.

FrugalTree

Thanks for this, it does look cheap versus peers. Do you think that there are any stale holders left form the Travis demerger as a number of the names look unusual for a UK small cap? The warning in July was a disaster for a new plc management team, it will take them some time to recover. The results in March absolutely must beat expectations, that is the major near term risk. I didn't realise that they were so good at click and collect for trade - that is really interesting, when I ask DIYers about Wickes they dont seem to know what the competitive advantage /USP is. I hold and should maybe average down.

M Wharrier

10th Feb '23

Thanks for this analysis.

I think the upside comes from:

1. The scope to take market share in trade and ‘do it for me’, which is v high incremental ROE. Wickes can be more aggressive given it is no longer part of TPK and initiatives here can be accelerated. In this context I am disappointed management continue to open new branches, it is a diversion and the effort would be better deployed on improving the existing national estate. Home Depot has opened virtually no new branches in the past decade and the share price has been amazing.

2. The capital structure is ridiculously strong, they simply do not need this level of net cash and once the outlook becomes more clear, special dividends and buybacks must be considered.

3. There is scope to improve management, they are too cautious, a little institutional and are poorly incentivised through equity.

Snazzytime

hi Mark

Thanks for your detailed review.

On the face of it this is yet another disappointing 2021 IPO floated in good times. I can see the attractions you outline but lease liabilities are extremely high with minimal NTAV so the risk / reward may not be quite so appealling. Also the lack of skin in the game by Directors does question whether they are sufficiently aligned with investors.

I understood that Travis Perkins decided to dispose of Wickes in order to concentrate on trade customers. However, one of Wickes main competitors you quote (Howdens) only deal with trade customers, so that reason seems rather contradictory given that all three are in the same market. Maybe there was another reason?

Snazzy

Wickes: Building for the future

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Mark Simpson

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