Morgan Stanley expects One Kingfisher may fail

The investment bank Morgan Stanley has this morning upgraded Kingfisher PLC, despite the fact they are convinced the turnaround strategy started last year, will ultimately fail.

Home Improvement analysts at the bank expect it to become clear in 2018, that ‘One Kingfisher’ hasn’t worked, at which point it believes investors will have to look for new ways to value the Home Improvement group. In a note to clients this morning Geoff Ruddell wrote “It seems to us that, if One Kingfisher fails, then investors will increasingly start valuing the group on its assets, not its earnings".

Read - Kingfisher Q1 Trading Update

Ruddell believes that it is “hard to create a credible sum-of-the-parts valuation” that suggests shares are worth much less than 400p, adding “Kingfisher has £3.4bn of freehold property, £0.6bn of cash and a surplus in its pension scheme.

“If Screwfix is worth, say 15x earnings, the other key operating companies would have to be valued on single digit PE [price-earnings] multiples to be worth less than 400p. The current share price would imply they are almost worthless.”

“Also, if One Kingfisher proves only partially successful, neither driving a shift in focus to asset backing, nor the increase in profitability that management is aiming for, the shares could yet drift down further.”

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The double upgrade didn’t do much for Kingfisher shares today, they fell 1.3% to 298p in mid-morning trade.

Source: Insight DIY Team

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