3 Reasons Why DIY Giant Kingfisher plc Remains A Buy

Is Kingfisher plc (LON:KGF) the pick of the retail sector?

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b&qWhen Kingfisher (LSE: KGF) (NASDAQOTH: KGFHY.US) updated the market with its second-quarter statement on July 24, the DIY giant’s shares shed 8% of their value in one day.

That fall has been partially reversed today, after the firm — which owns B&Q, Screwfix and the French Castorama and Brico Dépôt DIY chains — reported a solid set of interim results, and announced the departure of long-serving chief executive, Sir Ian Cheshire.

Why are the shares rising?

After its downbeat second-quarter update, I suspect investors were relieved to see that Kingfisher managed 1.8% growth in like-for-like sales during the first half, even though the group’s pre-tax profit remained flat, at £364m.

The firm’s appointment of Véronique Laury as its next chief executive is also likely to be popular. Ms Laury has been at Kingfisher for 11 years, and knows both the UK and French businesses very well.

Indeed, today’s news confirms my view that Kingfisher could be an attractive buy:

1. Strong finances

While the UK’s supermarkets have been busy loading up with debt, Kingfisher has been repaying its debt, and now has net cash of £496m, up from £259m at this time last year.

The firm’s underlying operating margin of 6.3% is extremely attractive for a large retailer, and is at least 50% higher than any of the UK’s major supermarkets.

2. Attractive yield

Kingfisher shares currently offer a prospective yield of 3.6% and trade on a P/E of 13.5, in line with the FTSE 100 average.

Although this isn’t the highest yield around, it’s worth noting that last year, Kingfisher’s dividend payout was covered twice by free cash flow — an outstanding measure of affordability and sustainability.

3. Geographical diversity

Kingfisher seems likely to face ongoing headwinds in France, where like-for-like sales have fallen by 3.2% over the last two years, but the firm is benefiting from growing sales elsewhere.

Like-for-like sales rose by 4.4% in the UK during the first half of this year, and by 3.1% in Poland, which is Kingfisher’s third-largest market, after France and the UK.

Buy Kingfisher?

Kingfisher’s management are investing in growth and taking a prudent, careful approach to maintain the company’s enviable financial strength.

In my view, this DIY giant is a more attractive income buy than any of the UK’s supermarkets, at present, and could deliver solid long-term capital gains.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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