City positive about Wolseley

Published:  29 September, 2009

LONDON: City analysts are upbeat about builders' merchant performance. In afternoon deals on Monday, Wolseley topped the FTSE 100 leader board with a gain of 10.2%, up 134p at 1443p per share despite reporting a pre-tax loss of £1.05bn. 

Howard Seymour at Numis Securities said: "Figures were broadly in line with our estimates with the exception of the net debt profile which was significantly better than our forecast."

Numis believes there is good medium term value in Wolseley and that management actions are key to unlocking the group's potential. However, the broker still favours early cycle plays that are exposed mostly to UK housing and RMI within the sub-sector of builders merchants. Numis today downgraded its recommendation on the Wolseley stock to Add from Buy with a price target of 1550p.

Tony Shepard at Charles Stanley said the results represent a "watershed". "We take some solace from some of the more positive trends such as that of improving cash flow in spite of the lower profitability."

He said that first-half trading in the new financial year to July 2010 will likely remain tough "but after the restructuring benefits we look for a small increase in annual profits though EPS will be diluted by the increased shares in issue following the £1 billion capital raising in April."

The broker believes the shares currently look fully valued after a near-40% rally over the last six months but still Charles Stanley has a Hold recommendation as it believes there may be a strong profit recovery beyond 2011.

James Cooke, analyst at Panmure Gordon, said the outlook remains mixed for Wolseley. "Our current cautious stance is a 'take profits call' after the strong run following the rights issue," he said. Shore Capital said that while the current stock valuation appears high at face value, it believes Wolseley's operational gearing is very high and the prospect of economic recovery should result in strong earnings momentum going forward. "The company's recent capital raising of around £1bn and the exit from the loss-making Stock business has also significantly reduced financial risks," the broker said.

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