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The Kingfisher (LSE: KGF) share price has been picking up since late 2022. But it’s down 17% over the past 12 months. The stock still looks undervalued to me, and I reckon it offers tempting long-term dividend prospects.
Some of the recent price weakness is presumably down to the early pandemic excitement fading. Back then, people were locked down in their homes for lengthy periods. And what better opportunity to spend a bit of time and money on all those DIY projects that were building up?
Kingfisher owns the well-known B&Q and Screwfix outlets in the UK. And it also includes France’s Brico Dépôt and Castorama in its portfolio, with the latter serving customers in Poland too. Around half of the company’s sales are from outside the UK and Ireland, so there’s a bit of protection against our struggling post-Brexit economy there.
Strong Q3
Full-year results aren’t due until 21 March. But third-quarter figures suggest we’re on for a good year. With a three-year like-for-like increase, sales were “significantly ahead of pre-pandemic performance“. The company reported a strong start to the fourth quarter too.
Soaring energy prices are hurting our pockets. But they’re helping the DIY market for energy efficiency products.
What effect is this outlook optimism and share price performance having on the Kingfisher valuation? Forecasts show the stock on a price-to-earnings (P/E) multiple of around nine. Generally, I’m cautious of forecasts. But we’re very close to full-year results, and the Q3 update was positive. I’d be very surprised if Kingfisher doesn’t meet market expectations this year.
Outlook
Looking ahead, the P/E would remain similar for the next couple of years if the analysts are close. That doesn’t suggest earnings growth. And the next two years look rather uncertain.
The Bank of England has just confirmed that the UK economy is likely to dip into recession. But the experts don’t think it’ll be as bad as previously feared. In the pandemic, housing market weakness helped drive people to DIY. But this time, property is under pressure for a very different reason — mortgages are so expensive, people simply don’t have the cash.
I’m also a bit concerned about Kingfisher’s debt. At the end of the first half, net debt stood at £1.8bn. That’s perhaps fine for a company with a £5.5bn market cap. But it was double the level of a year previously.
Cash
Cash was a bit weak too. Despite a retail profit of £555m, we saw free cash flow of only £104m. Cash conversion the previous year was a lot stronger. So, I’ll be paying close attention to the balance sheet and cash flow when I see full-year results in March.
On the upside, dividends have been comfortably covered by earnings. And the consensus suggests a yield of around 4.5% for the current year.
On balance, I rate Kingfisher shares a good match for my long-term strategy. The company seems to think they’re cheap too, as it’s engaged in a £300m share buyback. Kingfisher is a candidate for my next buy.
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