Cautious brokers upgrade Kingfisher on Q1 prospects

HSBC upgraded its profit expectations by 12 per cent to £364m for this year, while Numis has moved from £294m to £347m.

Both brokers believe that Kingfisher, especially its flagship B&Q business, will post better than expected numbers when it updates on June 2.

Better weather than last year over the crucial Easter holiday and encouraging evidence from the British Retail Consortium’s April retail sales data helped prompt the Kingfisher upgrades. HSBC expects first-quarter like-for-like growth of 2.5 per cent at B&Q, while Numis expects Kingfisher’s UK division to show a 5 per cent like-for-like rise.

But both brokers said a good first-quarter performance would not mean that Kingfisher was fully back on track. HSBC analyst Paul Smiddy said the next leg of the retailer’s share price performance – which has been up strongly since March – is dependent upon rebuilding B&Q’s UK normalised operating margins to 7 per cent and evidence that the troubled Chinese business is being reinvigorated.

He said: “An important test of whether the 7 per cent margin target is just a pipe dream will come from how the UK division manages gross margins this year – a time when input inflation is an increasing pressure point and when demand elasticity may be thought to be increasing.”

He noted that all five members of Kingfisher’s operating committee are now on the board of the Chinese arm and said: “While there is still no certainty of a trading recovery in China, we believe there is now certainty that the division’s performance will either improve or it will be sold. The current board has no emotional attachment to the business.”

Numis analyst Andy Wade does not expect an “aggressive” bounce in profits for the next financial year. He said: “With France and Poland later into the downturn and the UK DIY market competitive and over-spaced we do not expect a rapid rise in profitability.” He forecasts profits of £351m next year, against a consensus of £380m.