Exactly how Britain manages to negotiate its exit from the European Union is shaping up to be the defining geopolitical and macroeconomic event of our times. Who thought two years ago that we would be talking about possible food and medicine shortages and airplanes being grounded on domestic runways upon our historic departure?
We’re just over four months from when Article 50 pulls the UK out of the bloc and yet we are no nearer to knowing the outcome. Indeed, prime minister Theresa May’s political fragility means that any number of outcomes cannot be ruled out, from a chaotic ‘no-deal’ Brexit to the country avoiding any departure at all by way of a so-called People’s Vote.
Clipped wings
Those fearful over a prolonged and/or painful exit from the EU may want to give FTSE 100 retailer Kingfisher (LSE: KGF) an extremely wide berth.
Conditions on the UK high street have been steadily deteriorating over the past several months as the Brexit fog has intensified, and I believe there’s scope for things to get much worse before they get better. And latest data from the Office for National Statistics underlined the extent of the problem, total retail sales growing just 0.4% in the three months to October versus 2.3% in the quarter to July.
Kingfisher’s sliding share price since the spring — down 32% from the beginning of March, in fact — exemplifies these difficulties but this is not the only problem for the B&Q operator. In fact, its woes are threefold: those aforementioned pressures on Britons’ spending power; the drag created by its stuttering restructuring problem; and a troubled DIY sector in its other major market of France.
These problems were reflected in Kingfisher’s interim results of September when it declared that adjusted pre-tax profits had sunk 18% in the six months to July, to £323m. Back then chief executive Véronique Laury also advised that “the outlook for our main markets continues to be mixed.”
Danger ahead
Considering that the broad trading environment has only worsened since the summer I think that third-quarter trading numbers scheduled for tomorrow (November 21) could send the firm’s share price sinking yet again.
It’s not a surprise to have seen City analysts cutting their earnings estimates in the past few months and I can envision further reductions occurring in the wake of those Q3 results (profits rises of 7% and 20% are currently forecast for the years to January 2019 and 2020 respectively).
Because of this, Kingfisher’s low valuation, a forward P/E multiple of 10.5 times, doesn’t much tempt me. And nor do predictions of a 10.9p per share dividend for this year, up from 10.82p last year, or a 12.5p payout for fiscal 2020, projections that yield 4.5% and 5.1%.
So murky is the company’s medium-term earnings outlook, and so strained is its balance sheet that expectations of any sort of dividend hike look fanciful at best. All things considered, I reckon the risks at Kingfisher far outweigh the potential rewards in the current climate, and I therefore believe the retail play should be avoided at all costs.