Ferguson (FERG), the UK supplier of products and services to the water and heating, ventilation and air-conditioning (HVAC) industries, reported steady trading during February and March but said it was pulling its share buyback and this month’s dividend payment.
Turnover in the first two months of its financial second half was up 5.1%, with US sales - which make up 85% of the group total - showing growth of 8.2% but Canada and the UK showing a drop of 7.7% and 10.3% respectively. Shares eased 0.7% to £51.52.
GROWING VIRUS IMPACT
While the firm saw little material impact on its US sales in February and March, it admitted that ‘within the last ten days the impact of COVID-19 has significantly increased, mainly as a result of government actions and societal reactions as individual cities and states in the US have been increasingly impacted by the virus.’
The trading situation on the ground is ‘mixed’, with revenue in New York sliding due to the severity of the virus outbreak and the widespread lockdown. In other cities, revenues have been less affected, but the firm is preparing itself for a more widespread fall in demand as states and local jurisdictions roll out further restrictions.
In Canada, most of Ferguson’s markets are in lockdown and in the UK the situation is ‘extremely challenging’ with a widespread lockdown currently in place. Given the increasing uncertainty over the potential impact of the virus on sales, the firm has withdrawn its previous financial guidance for the year ending 31 July.
PRESERVING CASH
While Ferguson continues to generate significant cash flows and has plenty of liquidity, it has decided to halt its $500m share buyback in order to protect its cash position. Up to the end of March it had bought back $100m of shares.
Also, after ‘careful consideration’ the firm has pulled the interim dividend which was due on 30 April, although it will review its position on dividends later in the year ‘as trading conditions become clearer.’
It has also halted its acquisition programme, after spending $340m on six businesses so far this financial year. Small bolt-on deals have been a key contributor to Ferguson’s growth in the US and Canada so without further acquisitions top-line growth may slow in the coming year.
SECONDARY LISTING
Following the demerger of its UK arm Wolseley, Ferguson approached shareholders to determine whether it should apply for a secondary listing in the US or whether it should move its main listing there.
The rationale for moving the listing was that most of Ferguson’s customers are in the US, and with its US peers trading on higher multiples there was potential for the shares to re-rate, benefitting shareholders.
However, following recent consultations, the firm said it was unlikely to get the 75% shareholder approval it needed to move its primary listing so it has had to settle for an additional listing at some stage in the first half of 2021.
