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A new beginning
Travis Perkins plc (TPK:LON) | 727 54.5 1.0% | Mkt Cap: 1,545m
- Published:
29 Apr 2021 -
Author:
Bromehead Yves YB | Roger Paul PR -
Pages:
9
A new beginning
Travis Perkins successfully demerged its Wickes DIY business on the 28th April 2021. We believe this turns over a new page for management, enabling the divestment of the plumbing and heating division to focus energy on the core business via organic growth and bolt-ons.
Strengthening its building merchant leadership
We expect management to capitalise on the group, refocusing on its core DNA with plenty of medium-term opportunities to grow both organically (Toolstation) and through MandA. We believe the group could also look at new attractive verticals including HVAC and lightside specialities and further invest in digitalisation, the product offering and branches in an effort to grow market share.
Shareholder returns could be back
We anticipate the group will restart its dividend policy in the summer and we would expect more to come on the shareholder return front post the divestment of the plumbing and heating division and the incremental value generated as a merchant business.
A favourable UK renovation outlook
The UK renovation outlook has never looked this bright; homeowner equity is at record highs, equity withdrawal rates are healthy, interest rates are low and existing home transactions are booming. This should drive pent-up renovation demand until the decarbonisation renovation wave picks up the pace to drive 30 years of structural growth. We are optimistic on the UK distribution sector and our FY21/22 EBIT estimates stand +16%/21% above consensus.
Rating and investment case
We have updated our valuation methodology to reflect the divestment of Wickes and the higher implied multiple of building merchants vs DIY. We therefore apply a 6% FCF yield ex-growth CAPEX vs. 6.5% previously. This implies a 12x FY22 EV/EBIT multiple at our target price which we view as sensible and still well below peers such as Grafton or Howdens Joinery.