Wolsely well positioned for the longer term despite US turmoil

Oct 15 2007 by Iain Laing, The Journal

THE weakness of the US housing market together with the deterioration of the sub-prime loans market has been a signal that tough times may be ahead for a number of UK companies.

Looking more closely at the US housing market, recent figures show that new housing starts are at a 12-year low and that some mortgage holders are in danger of default. In addition, the US labour market has also been weaker than expected and fewer jobs could increase the risk of default on mortgage debt and consumer related loans.

This has all been negative news for the building materials market in which UK listed Wolseley is one of the largest players.

Wolseley is principally a builders merchant and the business is the largest distributor of plumbing and heating supplies with a focus on the US and Europe. The business has a good record for delivering steady growth from a mixture of bolt-on acquisitions and organic expansion. Indeed, the US and European markets are very fragmented providing a good growth opportunity for Wolseley. Bolt-on acquisitions account for a large part of the group’s yearly spending and there are a number of targets the company may consider.

Many of the businesses that operate in this space are the old ‘mom and pop’ type stores and Wolseley’s size has helped it to gain market share. In fact, Wolseley has an impressive record of doubling turnover every five years, which is no mean feat and highlights the growth potential of the business.

However, the group’s recent figures show that the US market is tight and pre-tax profit fell by 7%, breaking Wolseley’s 10-year run of consecutive profit increases. The US accounts for the lion’s share of earnings and it appears that the market may remain weak for the time being. Europe, on the other hand, has fared much better.

Wolseley purchased Danske Traelast Group (DT Group) for £1.35bn last year and the business has performed well. DT Group operates in the Nordic region and its addition has enabled Wolseley to reduce its reliance on the US market. In Europe, the group has also shifted its focus to concentrate on offices and industrial buildings where demand remains strong.

Looking forward, Wolseley has already taken action to restructure the business given the tougher market conditions and the workforce has been reduced by around 20%.

Although the group’s outlook statement is understandably cautious, the US Federal Reserve has recently reduced interest rates by 50 basis points to 4.75%, which may help to steady the housing market, and a further cut should not be ruled out. Wolseley is also sticking to its margin target of 7% by 2011, which is a statement of intent. In all the business appears well positioned for the longer term despite the weakness of its end markets.

Anthony Peart is an assistant director of the Wise Speke division of Brewin Dolphin Ltd. All prices are from public sources. The views expressed are not necessarily held throughout the Brewin Dolphin Group. Bear in mind that no investment is suitable for all circumstances and it is important to seek expert advice if in any doubt.