June 3, 2014 5:39 pm

Wolseley: nailing it?

Having cleared the financial plumbing, the group must seek growth

Would you rather be a hammer or a nail, Paul Simon asked. Why not a bit of plumbing? When real estate is booming, it all sells. Wolseley, a distributor of plumbing and heating materials, reported 5 per cent year-on-year organic revenue growth in its fiscal third quarter and issued a sanguine sales outlook on Tuesday. The US led the way – trends driving a recent pop in housing starts may be helping in Wolseley’s biggest market. UK property prices are also growing at their fastest pace in nearly seven years. Wolseley is the UK market leader.

But the company is at a delicate turning point. For the past five years, Wolseley has been restructuring. The company was hammered when the housing bubble burst in 2008. The fix-ups: a £1bn rights issue in 2009; a new chief executive; the sale of 20 weak businesses; and roughly £2bn of writedowns. Trading profits and earnings per share have turned round.

Now that the financial plumbing has been cleared, Wolseley must prove it can maintain growth by improving operations and seizing market share. This is not easy when Wolseley already dominates in its largest markets. The job will be harder still if the US and UK, which account for 70 per cent of revenues, do not co-operate. In the US, economic activity shrank in the first quarter for the first time in three years (partly because of bad weather). Rising mortgage rates could damp house-buying and remodelling activity. In the UK, Nationwide, a top mortgage provider, has said it sees signs “the housing market may be starting to moderate”.

Wolseley’s shares are trading at 17 times forward earnings. Analysts expect operating earnings will grow more than 12 per cent in each of the next two years: a big step up from the past two. Help from the economy is already priced in.

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