The Anglo File: Kingfisher's Hidden Net Value

U.K. retailers are out of fashion. But Kingfisher has some hidden value with its Internet stakes.
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LONDON -- The current fashion in the U.K. is to regard traditional retailers as hopelessly backward-looking and to be avoided at all costs. Yet some, like

Kingfisher

(KNGFY)

, are investing heavily in the Internet and this value is either being missed or simply ignored by investors.

Kingfisher shares remain mired in the fog that has grounded most British retailers. The stock has more than halved since it hit a 52-week-high of 946.5 pence last spring, before Kingfisher was outmaneuvered by

Wal-Mart

(WMT) - Get Report

in its bid for

Asda

. At the current price of 434 pence, the shares are trading at just 16 times earnings for the financial year ended in January.

However, hidden among Kingfisher's 10.9 billion pounds ($18 billion) of revenue and 720 million pounds in profits expected for the current financial year from such traditional businesses as its

B&Q

and

Darty

stores, are Internet stakes that could be worth millions more than their current value, argue analysts and money managers.

Logging On

Unlike many old-style retailers who fear that the Internet will marginalize their existing business and so have resisted logging on, Kingfisher has stepped sure-footedly onto the Net.

In partnership with

Europe@web

, a private company controlled by Bernard Arnault, the chairman of luxury goods company

LVMH

, Kingfisher owns a 45% stake in Internet service provider

Libertysurf

, which is expected to sell shares on the Paris stock exchange later this year.

On Wednesday, Kingfisher unveiled a minority stake in

Virtueller Bau-Markt

, which operates

heimwerker.de

, a German DIY e-commerce firm. And last summer Kingfisher bought

screwfix.com

, a U.K.-based DIY e-commerce site focused on the trade and mail-order business.

"We're focusing on a two-pronged approach," says Gwen Gober, the company's corporate affairs director. "Leveraging our existing brands and getting into pure plays like Libertysurf."

For example, in the DIY sector where purchases can be bulky and expensive to ship, Gober says customers who order online will have the option of picking up the merchandise at local stores.

Analysts and money managers say the strategy of combining existing business with the Internet makes intuitive sense.

"The stocks that will succeed are old-fashioned companies that show any attempt to embrace technology," says Philip Dumas, who as head of European institutional sales at

Durlacher

, a high-tech investment and research firm, has been recommending the shares to his clients. "Kingfisher seems to have done that quite successfully."

Even though the current value of Kingfisher's Internet interests is negligible compared with the company's total assets and placing a firm value on the Internet interests is more guesswork than financial reality, analysts argue that the market is failing to value these businesses at all.

Morgan Stanley Dean Witter

analyst Julie Ramshaw in a Feb. 2 research note values each of Libertysurf's 610,000 subscribers at 2,500 pounds -- or a 32% discount to the market price awarded each of the ISP Freeserve's 1.6 million customers -- to arrive at a per share value of 50 pence, or a mere 11% of Kingfisher's share price.

That element "is not implied in the current share price," wrote Ramshaw, who was unavailable for comment. She rates the shares a strong buy and her 12-month target is 725 pence, or 67% above the current price. Morgan Stanley Dean Witter hasn't performed underwriting services for Kingfisher.

Two-Way Bet

For investors nervous about climbing out on that Internet limb, Kingfisher comes with a safety net in the form of existing businesses. Its B&Q chain has held the leading market position in the U.K. for the past decade and Darty is the frontrunner in the French electricals market. The prominence of those two divisions almost certainly means that Kingfisher will play a role -- either as an acquirer or a takeover target -- in the coming European consolidation, say analysts.

Kingfisher is not without challenges.

Comet

, its electricals retailer, is a far second to the market leader

Dixons Group

and is operating in a climate of fierce price deflation. And with Asda learning a few tricks from its new parent, Kingfisher's

Woolworths

variety stores and

Superdrug

unit could suffer from declining prices for health and beauty products.

Furthermore, investments in e-commerce and store openings, which could reach 106 million pounds next year before tapering off, are likely to crimp profits in the near term.

Nevertheless, Paul Mumford, a portfolio manager with

Cavendish Unit Trust Management

, who has been buying Kingfisher shares, says the stock is a good two-way bet.

"Even if Kingfisher had nothing on the Net, it's still worth its current valuation," Mumford says. "The Internet is the icing on the cake."