Why the Kingfisher share price could make it a top buy right now

At Kingfisher (LSE: KGF) share price has been rising since the end of 2022. But it is down 17% in the last 12 months. The stock still looks undervalued to me, and I think it offers long-term dividend prospects.

Some of the current price weakness may be due to early pandemic excitement. At that time, people were confined to their homes for a long time. And what better opportunity to spend time and money on all those DIY projects you’re building?

Kingfisher owns the well-known B&Q and Screwfix stores in the UK. And it also includes Brico Dépôt and France’s Castorama in its portfolio, which also serve customers in Poland. About half of the company’s sales come from outside the UK and Ireland, so there is some protection against the struggling post-Brexit economy there.

Strong Q3

Full year results are not due until March 21. But the third quarter numbers show that we’re in for a good year. With a three-year like-for-like increase, sales were “significantly ahead of pre-pandemic performance“. The company also reported a strong start to the fourth quarter.

Rising energy prices are hurting our pockets. But they help the DIY market for energy efficiency products.

What impact does this outlook optimism and share price performance have on Kingfisher’s value? Estimates show the stock at a price-to-earnings (P/E) ratio of about nine times. In general, I am cautious about predictions. But we are very close to the full year results, and the Q3 update is positive. I will be very surprised if Kingfisher does not meet market expectations this year.

Outlook

Going forward, the P/E will remain the same for the next few years if analysts are close. That does not indicate earnings growth. And the next two years look uncertain.

The Bank of England has just confirmed that the UK economy is headed for recession. But experts don’t think it will be as bad as previously feared. In the pandemic, the weakness of the housing market helped drive people to DIY. But this time, property is under pressure for a different reason – mortgages are too expensive, people just don’t have the money.

I’m also a bit worried about Kingfisher’s debt. At the end of the first half, net debt stood at £1.8bn. That could be good for a company with a market cap of £5.5bn. But the rate is double from the previous year.

Cash

Cash is also a bit weak. Despite retail profits of £555m, we saw free cash flow of just £104m. Last year’s cash conversion was stronger. So I will be looking at the balance sheet and cash flow when I look at the full year results in March.

On the upside, dividends are comfortably covered by earnings. And the consensus suggests a return of around 4.5% for the current year.

On balance, I rate Kingfisher as showing a good match for long-term strategy. The company also thinks it’s cheap, having engaged in a £300m share buyback. Kingfisher is the next buy candidate.