Proactive Investors - Kingfisher PLC (LON:KGF) shares were getting mixed reviews a day after its underwhelming quarterly update, with big banks cutting their targets on the B&Q owner but suggestions the shares are now being harshly treated.
The Anglo-French DIY products chain cut its profit and cashflow guidance for the year due to weaker than expected trading in France, offsetting resilience in the UK and improvements in Poland.
Shares in the FTSE 100-listed group, which sank to below 200p for the first time in three and a half years last month, but had bounced up to 235p ahead of the update, fell over 6% yesterday to 214.5p and are struggling for position today.
Deutsche Bank (ETR:DBKGn), which reduced its target from 255p to 225p, noted that the issues are "all macro-driven in our view", reflecting a reversal of the pandemic spending boost.
Analyst Adam Cochrane said "the fear is that this reflects a post-pandemic spend reversal, the impact of lower inflation on the top line, big ticket spending weakness, slower housing transactions and France economic weakness".
He said the "micro picture is much more nuanced" for Kingfisher's Castorama and Brico Dépô, but that there was "limited visibility" on how sales might far into the 2025 financial year,
Based on this, and with cost inflation "getting harder to offset", Deutsche forecasts broadly flat profit progression for the next two years.
While Barclays (LON:BARC) made substantial cuts to its forecasts and also lowered its target on Kingfisher to 300p from 325p it reiterated an 'overweight' stock rating, with analyst James Anstead saying the shares look "cheap even assuming historically low margins".
He highlighted the unexpected extent of the company's weak third-quarter sales in France, but sees the company's shares trading for multiples "undemanding".
Acknowledging that there is a problem with the lack of visibility that follows several profit warnings, "even if these could be characterised as driven much more by 'background issues' rather than company-specific execution", which does pose a "significant challenge" to the positive share rating.
But Anstead said he feels his margin assumptions are "more likely to err on the side of caution rather than optimism", with EPS forecast of 28.2p for 20205 and 2026 including margin assumption for the UK business around 100 basis points below the average in the two years before the pandemic, and the equivalent figures for France and Poland are around 50bps and 450bps, respectively.
"We do not see any structural reason why margins should contract so much versus history."