Description

Wickes Group (WIX LN), a UK-listed home improvement retailer, spun out of Travis Perkins (TPK LN) last year and favorable spin-off dynamics appear to have contributed to the stock trading well below intrinsic value

In Q2’21, Travis Perkins, one of the largest UK-based distributors of building materials to large contractors and housebuilders, spun off Wickes Group in the form of a de-merger. WIX LN subsequently traded off and the stock remains roughly 25% below the post-spin share price. WIX LN’s post-spin market cap was ~£0.7bn, or less than 15% that of Travis Perkins around the time of the separation, and we believe that several large legacy shareholders reduced their positions in Wickes following the de-merger due to market cap and/or liquidity constraints, without much regard for price or valuation. Large legacy Travis Perkins shareholders reduced their holdings by roughly 60mm shares between 6/30/2021-12/31/2021, equivalent to ~23% of WIX LN’s outstanding shares, representing close to ~50% of the trading volume during that period.

While investors may understandably be concerned about the sustainability of recent UK DIY market demand, it is worth noting that Wickes’ DIFM (Do-It-For-Me) business is set to rebound after being negatively impacted in 2020/2021 by pandemic-related lockdowns and storeroom closures. While WIX LN reported total organic sales growth of +19% on a 2-yr basis in 2021, DIFM organic growth was down -21.7% on a 2-yr basis. However, WIX LN’s DIFM trends have since meaningfully improved. Last month, WIX provided a trading update (for the 20 weeks ending May 21st) stating that YTD trading had been in line with expectations - the Company’s overall YTD organic sales was -0.6% yoy, with DIY/Trade organic sales of -7.2% yoy but this was mostly offset by DIFM sales growth of +31% yoy.

CY 2020 DIFM Organic Sales trend (%)

Wickes May 26th 2022 trading update: “[DIFM] installation lead times have returned closer to more normal levels, and we continue to expect delivered sales for the full year to be ahead of 2019”

We believe WIX LN’s discounted valuation is undeserved given that the Company has demonstrated a leadership position in the UK DIY/DIFM market, with several of the largest DIY-focused operators appearing to have gradually lost share to Wickes due to a gradual consumer preference shift to DIFM.  WIX LN’s operating metrics also compare favorably to one of its closest peers, B&Q, which is operated by publicly traded Kingfisher. Wickes’ average sales per sq. ft has improved from £186/sq ft in 2017 to £236/sq ft in 2021, and consistently outperformed B&Q’s sales productivity (~£172/sq ft in 2021). By focusing on a more curated/tighter product range (~10K SKUs in-store vs. ~40K SKUs in-store for B&Q), WIX LN is also capable of turning its inventory more efficiently than Kingfisher (WIX LN’s inventory turns are ~5.5x-6x vs. ~3x for Kingfisher).

We believe Wickes’ valuation is undemanding at <8x earnings and <5.5x EBITDA under IFRS-16 accounting standards (where the Balance Sheet is burdened by over £700mm of operating lease liabilities). The valuation would be even less demanding if rental-related payments were instead treated as expenses (~3.5x Adj. EBITDA), which we think is more appropriate. It is also worth noting that downside should be limited by the fact that the Company is debt free (excl. operating leases) and carries a cash balance of £123mm, representing roughly 23% of the market cap.  Valuing WIX LN at 6x-8x Adj. EBITDA (keeping operating leases off the B/S and deducting rental expenses from EBITDA), or approx. 12x -16x earnings, would imply upside of ~50% to 100%.

Catalyst

No hard catalyst but we would expect WIX LN to re-rate higher as the DIFM business rebounds and non-economic selling abates.