Headlam Group plc (LON:HEAD) is the topic of conversation when Zeus Capital’s Equity Research Director Andy Hanson caught up with DirectorsTalk for an exclusive interview
Q1: Headlam Group made an interesting announcement today, can you tell us what it was about?
A1: Yes, two announcements from Headlam this morning. The first one being a trading update for FY17 so basically the 10 months until the end of October and also, they’ve announced a nice acquisition.
Let’s maybe go through the trading statement to begin with. So, looking back, Headlam had a good first half to the year so up until June, they performed strongly in all areas of the business, both UK and Continental Europe. Trading since June has got a little more difficult in the UK and like-for-like sales in the residential were broadly flat in the first 4 months in the second half which actually, putting into context, is a very good performance, and the commercial division has seen a decline in like-for-like revenues.
What surprised me in this statement is you might have expected it to be the other way around with commercial still going ok and residential underperforming so that was a slight surprise. Interestingly, Continental Europe continues to move forward so I guess the trends that Headlam are seeing at the moment reflects the wider macro conditions, Continental Europe macro data is improving whilst the UK is definitely seeing a bit of a slow-down.
Q2: So, what effects does this have on your forecasts?
A2: For FY17, because we’re almost at the end of FY17, it has very little impact on those numbers, so I’ve tweaked my revenue forecasts down a little bit, I’m now forecasting £705 million top line against £711 million effectively. This is still seeing growth on the £694 million that they reported in 2016 but it’s a slight tweak down on my previous forecasts and at the PBT line, it takes a couple of hundred grand off but I’m still forecasting £42.5 million. So, very very little impact in FY17.
Rolling forward, the deterioration trading that we’ve seen in the second half will have filtered through into my 18/19 forecasts but the acquisition they’ve undertaken today, the acquisition of Domus, offsets that because they’re effectively using cash to buy that business. So, that’s immediately earnings-enhancing and it adds about 5% to the top line and interestingly, because of the margins in the business, the impact to earnings is actually greater than that. So, I’m actually upgrading my 18/19 numbers by about 8% and 10% respectively. When you put that in the context of some difficult trading environments, I think that’s a very very good performance.
The balance sheet is still upstretched, they’ve still got net cash on it at year-end so potentially we’ve got further acquisitions to come next year. Headlam have, historically, provided special dividends, I think that’s less like in FY18 now, just because the capex they’re going to put into one of their distribution centres in Ipswich.
Overall, the fact that we’ve upgraded numbers in 18/19 should be taken positively considering the sector has seen quite a few profit warnings.
Q3: Now, you said there were two announcements today, the second being an acquisition, does that any impact on the valuation of Headlam Group?
A3: The fact we’re bringing the upgrades into ’18 and ’19 does lower the valuation of the business. So, the business in ’18 now is trading on sub 12 times Price Earnings. I think for a business of this quality, that’s a very reasonable multiple and the yield on it, interestingly, is 4.7% and the yield is very well covered, and the business remains cash-generative, also, without a lot of debt, leverage risk is pretty low here.
The share price has come back from £6.40 down to last night’s closing price of £5.25 so the shares have already come back quite a way and that’s obviously reflected in the valuation. The shares would seem very good value at this level for investors prepared to look slightly longer-term.
