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The 1H25 pre close update from Headlam, the UK’s largest flooring distributor, showed that Group revenues are declining at a reduced rate. Within the mix, Large Customer and Trade Counter volumes continue to expand, partially offsetting subdued Regional Distribution activity. As flagged at the AGM, the rate of improvement is slightly slower than was previously expected and management are accelerating the implementation of the transformation plan. Management is also looking to deliver more than the original £25m cost savings from the programme and will provide more details on the plan later in the summer. At this stage, it remains unclear how quickly these incremental initiatives will take to benefit the bottom-line. Therefore, we continue to expect no material benefit in FY25. Overall, no change to our earnings or cash flow forecasts.
Headlam Group plc
Trading conditions have remained challenging but Headlam has accelerated its transformation in response. This should realise significant capital and reduce costs. We believe the business will be better set for market recovery when it comes. We reiterate our Hold rating and 150p TP.
Trading conditions have been challenging for Headlam over the past few years, but the group continues to deliver on its transformation program. We believe the business will be better set for recovery when the market improves. We reiterate our Hold rating and 150p target price.
The AGM update from Headlam, the UK’s largest flooring distributor, showed that Group revenues are declining at a reduced rate. Within the mix, Large Customer and Trade Counter volumes continue to expand, partially offsetting subdued Regional Distribution activity. However, the rate of improvement is slightly slower than management had previously exacted. To compensate, they are accelerating the implementation of the transformation plan. Management is also looking to deliver more than the original £25m cost savings from the programme and will provide more details on the plan in the summer. At this stage, it remains unclear how quickly these incremental initiatives will take to benefit the bottom-line and we are increasing our FY25 pre-tax loss assumption (from £24m to £28m). However, the restructuring should enhance the underlying earnings power of the Group, and we are leaving our FY26 earnings estimates unchanged.
Trading conditions have remained challenging but Headlam has accelerated its transformation in response. We believe the business is better set for the recovery. We reiterate Hold and our 150p target price.
FY24 results from Headlam, the UK’s leading flooring distributor, showed whilst still declining, YoY revenue trends improved during 2H24. Within the mix, Large Customer and Trade counter volumes continued to expand partially offsetting subdued Regional Distribution activity. The fundamental restructuring of the Group is gaining pace. This was reflected in our tour of Regional Distribution clients in December. The re-positioning should enhance Headlam’s market share and is enabling Headlam to free up considerable capital (via property disposals). Therefore, while the macro environment remains volatile, and the evolving revenue mix is leading to lower gross margins, the restructuring should enhance the long-term value of the Group. Overall, no change to our earnings forecasts, cash generation assumptions moving higher.
Trading conditions remained challenging through FY24 but Headlam continues to respond to the ongoing weak market and has accelerated its transformation in response. We believe the business will be better set for the recovery. We reiterate our Hold rating and our 150p target price.
Headlam, the UKs leading flooring distributor, experienced improved YoY revenue trends during 2H24 and the full year outturn is broadly in line with revised estimates. Within the mix, Large Customer and Trade counter volumes continued to expand in 2H24. Regional Distribution remained subdued. The fundamental restructuring of the Group is gaining pace. This was reflected in our recent tour of Regional Distribution clients. This re-positioning should enhance Headlam’s market share and is enabling Headlam to free up considerable capital (which has been tied up in property). Therefore, while the macro environment remains volatile, and the evolving revenue mix is leading to lower gross margins, the restructuring should enhance the long-term value of the Group.
Ahead of plan – this is an important step in transforming Headlam’s cost base and balance sheet. Total proceeds from property sales should now amount to >£75m. This transaction makes the upside from market recovery more tangible. We reiterate our Hold rating and 150p TP.
Headlam, the UKs leading flooring distributor, is experiencing improved YoY revenue trends and the full year outturn is likely to be fractionally ahead of previous estimates. Within the mix, Large Customer and Trade counter volumes are expanding more quickly than we had forecast. Meanwhile, the improvement in Regional Distribution is slower than we had forecast. Consequently, the change in the sales mix is different to that which we had previously forecast, which is impacting the blended gross margin and the 2H pre-tax loss is likely to be in line with 1H24. However, the fundamental restructuring of the group is gaining pace. This re-positioning should enhance Headlam’s market share and enable the group to free up considerable capital that is currently tied up in property. Therefore, while the macro environment remains volatile, the restructuring should enhance the long-term value of the group.
Headlam continues to respond to the ongoing weak market and has accelerated its transformation in response. The changes remain on track, with a further £5m of cost savings identified. We believe the business will be better set for the recovery. We reiterate Hold and our 150p target price.
We see potential for both business transformation and improving macro trends and believe the business will be better set for market recovery when it comes. We reiterate Hold and maintain our TP of 150p for now.
Given the detailed updates in May, the headline 1H24 financials contain no material surprises. Unfortunately, when it comes to purchasing big-ticket items, the consumer remains on-the-sidelines. Consequently, we are increasing our pre-loss assumptions for both FY24 and FY25. However, the fundamental restructuring of the group is gaining pace. The simplification of Headlam’s branding is allowing a repositioning of the sales and distribution network. In time, this should enhance market share (and enable Headlam to free up considerable capital tied up in property). Therefore, while the macro environment is challenging, the restructuring should enhance the long-term value of the group.
Headlam is responding to the continuing weak market by a reassessment of costs and sites. This should realise significant capital and reduce costs. We believe the business will be better set for market recovery when it comes. We reiterate our Hold rating and 150p TP.
Headlam, the UKs largest floor covering distributor, has provided a trading in line pre close update for the six months to Jun-24. Whilst remaining soft, recent YoY revenue trends have been consistent with the opening months of the year, and we are leaving our full year estimates unchanged. We believe investors will be pleased to see that moves to simplify the organisational structure of the business are progressing and anticipate the “detailed update in September” on the strategy will prove to be an important catalyst for the shares.
Headlam issued an unscheduled trading update (14 May) indicating that macro headwinds continue to impact revenues and earnings more than previously expected. In the first four months of FY24 revenues were down 12.3% and the group generated a pre-tax loss of £10.6m. As a consequence, management is accelerating the pace of the transformation programme, with the benefits largely materializing in FY25. We now expect a pre-tax loss of £24.1m in FY24. Macro environment: Recent improvements in headline consumer confidence are encouraging. However, this has not been matched with an accompanying improvement in major purchase trends (see GFK major purchase intensions and Barclays home improvement data). This position is usual across most cycles, with major ticket activity typically lagging earlier headline indicators. Therefore, Headlam's position is understandable but unfortunately more acute than we had previously anticipated. Crucially its self-help initiatives (eg major account sales and trade counters) continue to make positive progress. Affirmative action: Management is responding to the shortfall in activity by accelerating the network transformation. This will entail a fundamental revision of its cost base and distribution network structure. We anticipate this will remove £15m of SG&A costs in the network (annualised basis). Whilst the repositioning of the network will take 12 to 18 months to complete, it has already started. For example, the sale of the Stockport site is likely to complete in the next few weeks. Moreover, since Headlam typically owns the freehold of its properties, this repositioning will unlock considerable value. We anticipate the net proceeds could be £50m. Near-term forecasts: At this stage the full year outlook is uncertain. Given the business lost £10.6m in the first four months of the year and that trends in April showed no improvement, a first half pre-tax loss could be in the region of £16m. As the business enters the second half, comparatives ease, and the accelerated transformation should improve the monthly cost run rate. Therefore, a halving of the loss (2H vs 1H) is probable.
Headlam is responding to the continuing weak market by a reassessment of costs and sites. This should realise significant capital (>£50m) and reduce costs. We believe the business will be better set for market recovery when it comes. We reiterate our Hold rating but reduce our TP from 225p to 150p.
Headlam Group has laid out an ambitious long-term revenue target of between £900m and £1bn, as it seeks to grow its share of the UK floor coverings distributor market. Despite a challenging backdrop due to the low level of residential housing transactions, management is seeking to expand each of its sales channels: Trade Counters, Larger Customers, Regional Distribution and Europe & Other. The FY23 results reflected the more challenging environment and the group trades at a discount to its long-term average EV/sales multiple for FY24.
Whilst trading is tough, the company has good asset backing and will be well placed, in our view, for the inevitable market recovery. However, we reduce our target price from 250p to 225p to reflect the reduced earnings expectations but maintain our target multiples of 12x PE and 8x EV/EBITDA. We reiterate our Hold rating.
Headlam endured an increasingly tough year in FY23. During the period Headlam experienced tough headwinds across Residential related activity. This was partially offset by better trends in Commercial related activity and strategic initiatives (e.g. large accounts and trade counters). Given the operational gearing of the business, this volume decline impacted margins. We believe this slowdown is cyclical, rather than structural, in nature. Therefore, as consumer sentiment improves, we see profits recovering to (at least) previous highs. A mixed floorcoverings market: Lower volumes put pressure on both gross and EBIT margins. However, proactive management of rebates and cost mitigation plans have helped profitability. Therefore, whilst underlying EBIT declined from £39m (FY22) to £16m (FY23), the final outturn must be regarded a respectable one. Self-help measures adding value: Whilst the trading environment remains challenging, Headlam’s self-help initiatives are performing well. Trade Counter revenues were up +8.5% in FY23 vs FY22. Some of this uplift reflects investment in the network. Crucially, underlying LFL trends are also positive. Elsewhere, revenues from Larger Customers were up +25.6% YoY, reflecting new account wins and the gaining of a larger share of wallet from existing clients. Accelerating Trade Counter roll-out faster than we had expected: At the interim results Headlam confirmed that it planned to have 100 Trade Counters open by Dec-25 (previous guidance 90). Our model had assumed openings were to be materially back-end loaded. Given the success of the roll-out, we now expect a greater number to occur during FY24. Principally due to this phasing, we have added £6.0m to our OPEX forecast for the current year. Our revenue numbers remain unchanged. As a result, we are now forecasting PBT of £7.4m (FY24), previously £13.4m. The downturn is cyclical rather structural: Investors have been understandably focused on the short-term volatility in trading. However, our analysis shows that self-help measures and a normalisation of demand patterns should (in the medium term) ensure profits at least return to pre-pandemic levels (£43m FY17-FY19 average). As this rebound unfolds we anticipate shares will recover to historical levels. Our BUY recommendation and 530p target price assumes that earnings and the forward P/E simply returns to historical averages.
Trading conditions have remained challenging as the pressure on households continued through the last few months of the year. The shares are trading below NAV, which demonstrates the potential value.
Headlam, the leading floorcovering distributor, has issued a trading in-line pre close update for the 12 months to Dec-23. UK revenues (87% of FY23 total) were “broadly flat” YoY, with activity underpinned by a “robust” performance within the commercial segment. Confirmation of the in-line profit performance for FY23, indicates that 2H23 earnings were similar to those generated in 1H23. A mixed floorcoverings market: Trading in the autumn was characterized by the weak residential market being offset by a more resilient commercial market. As previously discussed, lower volumes put pressure on margins. However, proactive management of rebates and cost mitigation plans have helped profitability and Headlam has confirmed that FY23 earnings are in line with forecasts. Self-help measures adding value: Whilst the trading environment remains challenging, Headlam’s self-help initiatives are performing well. The update confirms that trade counter revenues were up +8.5% in FY23 vs FY22. Some of this uplift reflects investment in the network. Crucially, underlying LFL trends are also positive. Elsewhere, revenues from Larger Customers were up +26.0% YoY, reflecting new account wins and the gaining of a larger share of wallet from existing clients. Maintaining FY23 dividend forecasts: Whilst earnings trends are soft, Headlam has a healthy liquidity position. This has been boosted by the receipt of the £8m insurance payment relating to the Kidderminster fire. Consequently, we are maintaining our FY23 dividend forecast of 10.4 pence. Recommendation: Investors have been understandably focused on the short-term volatility and the shares have retreated since January. However, our analysis shows that self-help measures and a normalisation of demand patterns will (in the medium-term) deliver profits more than £40m. Our mid-case scenario shows £57m of PBT (medium-term view). As the expected rebound in earnings occurs, we see scope for a material uplift in share price to historical levels. Our BUY recommendation and 530p target price assumes that earnings and the forward P/E simply returns to historical averages.
Trading conditions are challenging, given the pressure on the housing market and increase in rates. The company has a number of self-help levers, which should enable improvement in future years. The shares are trading below NAV, which demonstrates the potential value. We reiterate our Hold rating and 250p TP.
Headlam, the UK’s leading flooring products distributor, has delivered a broadly trading in line update (covering the 11 months to Nov-23). Whilst volumes remain subdued, we anticipate investors will be pleased to see a sequential recovery in activity in November, following a weak September and October. As discussed previously, the challenging trading environment has impacted volumes and gross margins, and we expect PBT to decline from £37m (FY22) to £11m (FY23). However, self-help initiatives are performing well, validating the group’s strategy, providing the platform for incremental revenues opportunities. Weak trading environment: Interim results showed that top-line trends remain firm, but reduced volumes were putting pressure on margins. This picture has been replicated in the second half. During 2H23, top-line progression has eased, principally due to a weak September and October and YoY comparatives. YTD (11 months to Nov-23) and FY23 revenues are likely to be broadly similar to FY22. Whilst the trading environment is challenging, Headlam is gaining market share: Part of these gains reflect the group’s ability to take share during downturns. The gains also reflect the successful application of self-help initiatives. As an example, in the first 11 months of FY23, revenue from Large Account customers is up +27% versus the same period last year. Meanwhile, revenues from Trade Counters are up +9.0% versus the same period last year. Forecasts: We are leaving our top-line forecasts unchanged. Given the month-on-month volatility, we are reducing our FY23 EBIT margin assumptions from 2.5% to 2.4% (£0.2m impact to PBT). Due to higher interest rates, we are increasing our financing charge assumptions from £4.4m to £5.0m (£0.6m impact to PBT). Recommendation: Investors have been understandably focused on the short-term volatility and the shares have retreated since January. However, our analysis shows that self-help measures and a normalisation of demand patterns will (in the medium-term) deliver profits ahead of historical levels. As the expected rebound in earnings occurs, we see scope for a material uplift in share price to historical levels. Our BUY recommendation and 530p target price assumes that earnings and the forward P/E simply returns to historical averages.
An increasingly weak pricing environment is putting pressure on gross margins across most of the building materials and building-related supply chain. Therefore, ahead of the important pre-Christmas floor laying season, we are reducing our FY23 pre-tax profits for Headlam. Crucially, the group has a healthy liquidity position, and we are maintaining our FY23 dividend forecast of 10.4 pence.
Close to the nadir? Trading conditions are challenging given the pressure on the housing market and increase in rates. The company has a number of self-help levers, which should enable improvement in future years. The shares are trading below NAV, which demonstrates the potential value.
The company continues to take action to offset the impact of lower volumes, both through streamlining operations and delivering on strategic initiatives. Operational cash performance was resilient in the period and supports the dividend payments.
Headlam, the UK’s leading flooring distributor, continues to deliver top-line growth with new business streams and growth in Commercial (+8.4%) compensating for ongoing weakness in residential volumes. In the six months to June 2023 sales were +2.5% ahead of the same period last year. However, pricing trends and operating cost inflation are impacting on gross margin trends, providing a considerable headwind for the group.
Market conditions are highly challenging, hence the scale of reductions. The business continues to have significant asset backing and a strong balance sheet and the investments should deliver improvements as the market improves.
Headlam, the UK’s leading flooring distributor, continues to deliver top-line growth with new business streams compensating for ongoing weakness in residential volumes. In the six months to June 2023, sales were +2.5% ahead of the same period last year. However, principally due to the reduction in residential volumes (down 7% YoY), we are reducing our FY23 PBT estimate from £31m to £17m.
We reduce our forecasts by 9% and our target price to 350p reflecting these changes. Headlam should come through this difficult period in good shape given the strong balance sheet, asset backing and level of self-help. On our new numbers Headlam is trading on sub 10x PE and a 6.8% dividend yield.
Headlam, the UK’s leading flooring distributor, is effectively delivering top-line growth with new business streams more than compensating for ongoing weakness in residential volumes. In the four months to April 2023 sales are +3.4% ahead of the same period last year. However, the reduction in manufacturer price increases and a change in sales mix is impacting on gross margins. Despite taking mitigating actions we expect the contraction will impact FY23 earnings and we are reducing our full year PBT estimate from £33.5m to £31.0m.
The shares are trading on 10.7x PE and yield 5.4%. We think Headlam should come through this difficult period in good shape given the strong balance sheet, asset backing and level of self-help.
Headlam, the UK’s leading flooring distributor, continues to see growth within the European and UK commercial segments and a softening in UK residential activity. New sales initiatives are coming through and cost headwinds are being offset by positive pricing and operational efficiencies. Consequently, both FY22 revenues and profits were marginally ahead of (previous) expectations.
The shares are trading on 11x PE and yield 5.3%. We think Headlam should come through this difficult period in good shape given the strong balance sheet, asset backing and level of self-help.
Headlam, the UK’s leading flooring distributor, continues to see growth within the European and UK commercial segments and a softening in UK residential activity. New sales initiatives are coming through and cost headwinds are being offset by positive pricing and operational efficiencies. Consequently, both revenues and profits are “expected to be marginally ahead of market expectations”.
Infill acquisition – although relatively modest in scale, we believe this acquisition could drive additional benefits as it increases Headlam’s scale in rugs, adds large retail customers, brings B2C capability and will provide additional operational benefits. Melrose also has a range of rugs made from recycled material.
Headlam, the UK’s leading flooring distributor, continues to see growth within the European and UK commercial segments. However, the business is inevitably seeing a softening UK residential activity and is experiencing increasing cost headwinds. FY22 PBT is likely to be marginally below the lower end of market expectations, though higher than FY21. As a consequence, we are adjusting our FY22 PBT from £41.8m to £36.6m.
A challenging environment Headlam has reported that sales YTD are marginally below last year, which is in line with our expectations. However, this is requiring more investment to deliver, which means that profits will be ahead of last year (£35.8m) but marginally below our forecast. We are reducing our FY22E PBT by 3% to £37m and FY23 by 8% to £33m, reflecting a tough consumer environment. The shares are trading on 10x PE on our new FY23E and yield 6%. Headlam should come through this difficult period in good shape given the strong balance sheet, asset backing and level of self-help. We have reduced our target price from 420p to 400p to reflect the lower forecasts. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
A tougher market Headlam will issue a trading update on 24 November. We expect September to have been a tough market given the death of the Queen and extra bank holiday. Judging from other businesses supplying home furnishings, recent trading has been subdued but more consistent. We are taking a more cautious view on the remainder of the year given the pressure on consumer budgets, higher interest rates and downturn in the housing market. Clearly this will carry on into FY23 and the company will continue to see higher costs (eg energy and wages). We expect management action to mitigate some of the impact of weaker market conditions, with further cost savings and the focus on national accounts and roll-out of trade counters. As a result, we are reducing our 2022E PBT by 5% to £38m and 2023E by 10% to £36m. The shares are trading on 8.8x PE on our new FY23E and yield 6.4%. We think Headlam should come through this difficult period in good shape given the strong balance sheet, asset backing and level of self-help. We have reduced our target price to 420p to reflect the lower forecasts. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com
Strategic initiatives helping to offset slow market 1H sales were close to last year’s level (-2%) and profits are on track for full year forecasts, as benefits from the growth & cost strategy come through. Sales in July and August followed a similar trend to 1H. The key initiatives, such as focusing on national accounts and trade counters, are helping to mitigate a tougher end market. We are reducing our FY23 forecast by £2m due to higher energy prices. We think Headlam continues to look highly attractive given the delivery of its strategy, combined with £120m of freehold property at cost and £148m of inventory. The shares also offer a 7% yield. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 3-page note
Headlam, the UK’s leading flooring distributor, continues to trade in line with expectations. Interim results confirm that ongoing expansion in commercial sector activity and self-help projects is largely offsetting a weaker performance in the UK residential sector. Meanwhile, Headlam had demonstrated considerable success in securing new major accounts (both in retail and housebuilding). Therefore, despite increasing macro headwinds, we anticipate sales and operating margins in FY23 to be similar to FY22.
Trading as expected and high level of asset backing Sales were close to last year’s level (-2%) and profits are on track for our full-year forecasts, as the benefits from the growth and cost strategy come through. The key initiatives, such as focusing on national accounts and trade counters, should mitigate a tougher end market. Headlam continues to look highly attractive to us given the delivery of its strategy, combined with £120m of freehold property at cost and £148m of inventory. The shares also offer a 6% yield. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 3-page note
Headlam, the UK’s leading flooring distributor, continues to trade in line with profit expectations. The 1H22 pre-close update confirms that ongoing expansion in commercial sector activity and self-help projects are largely offsetting a weaker performance in the residential sector. Self-help initiatives are increasingly going to contribute to volumes thereby compensating for the more challenging macro environment (especially within residential). Consequently, we are maintaining our revenue forecasts for both FY22 and FY23 (despite increasing macro headwinds).
Strategy delivering in tougher markets Headlam will release a 1H IMS on 28 July. We expect it to announce that sales are close to last year’s level and profits on track for full year forecasts, as benefits from the growth and cost strategy come through. The key initiatives, such as focusing on national accounts and trade counters, should mitigate a tougher end market. We are taking a more cautious view on FY23 numbers, given the consumer concerns and economic headwinds, but expect Headlam to continue to make progress. We cut our target price to 500p to reflect lower comps and the outlook for consumer spend. Headlam continues to look highly attractive given the delivery of its strategy, combined with £120m of freehold property at cost and c.£130m of inventory. The shares also offer a 6.3% yield. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 3-page note
Headlam, the UK’s leading flooring distributor, continues to trade in line with profit expectations. The AGM update confirms that ongoing recovery in commercial sector activity and new client wins within multi-channel are largely offsetting a weaker performance in the residential sector in April. Meanwhile, the margin expansion continues, ensuring that profits are trending in line with expectations.
Reassuring trading update Sales in the first four months are in line with last year and our expectations, and profits are ahead of last year due to continuing strong margin performance. Market conditions have softened with the growing pressure on consumers, but the company continues to be comfortable with profit expectations for the year due to price increases and cost improvements. The growth initiatives are starting to come through, with new customer wins in the multiple retailer segment, increased sales from digital channels and an encouraging performance in the trade counters that have received investment. We believe Headlam is well positioned to manage a tougher environment given its growth projects, cost initiatives and strong balance sheet. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com
PBT of £35.8m (INVe = £35m) and net funds of £53.7m, in line with Jan’22 guidance. Trading in January and February 2022 was “in line with plan, with the strong margin performance in 2021 maintained into 2022”. The gross margin rise (+220bps to a record 33%, partly driven by inflation) is encouraging, and management state that they have able to “largely mitigate the industry wide issues, including supply issues, with inventory position maintained and levels of availability preserved”. “Product supply issues during the year led to significant price increases. However, these were passed directly into the marketplace and absorbed owing to the relative infrequency of consumer purchases and proliferation of product at varying price points.” Chris Payne confirmed as permanent CEO following an independent search. Surplus capital return has been quantified at £30m (evenly split between a special dividend and a buyback programme). This special is in addition to the FY dividend of 16.4p. Our view: It’s early days, but there is enough in these results, in our view, to demonstrate that the revenue drivers outlined in last year’s CMD are beginning to come through visibly (Trade Counter, Digital, Multiple Retailers etc.). The capital return rewards investors while those drivers accelerate, and – importantly in the current environment – we think deliverability risk is low. Changes to forecasts: none except to reflect the capital return in FY22E in net cash: £34m (prev. £42.4m), adjust for the buy back in the share count, and to introduce FY23E forecasts. Valuation: The shares trade at a 25%+ discount to their long-term historical NTM PE, and remain at a significant, 40%+, discount to the rating of peer Victoria (VCP.L N/R). We restate our Buy recommendation and target price.
Capital return of >10% The full-year results were in line with forecasts and the current year has started in line with expectations. Headlam is making good progress on its strategic initiatives, with plans to accelerate sales and improve UK margins to >7.5%. The main event in the results is the £30m capital return (a 17.7p special and £15m SBB) in addition to the normal dividend. This will still leave the business in a net cash position, leaving the company well placed to invest in the business, undertake infill acquisitions or make further returns. After the recent sell-off, the shares are on a sub 10x PE and the yield on the final and special is 8%. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Headlam, the UK’s leading flooring distributor, is trading well. The FY21 results show record gross margins, which are helping the ongoing recovery in profits (adj PBT £35.8m vs £15.4m in FY20). Current volumes underpin our FY22 forecasts, which we leave unchanged. Meanwhile, we see the benefit of self-help (eg. trade-counter strategy) enhancing the earnings growth profile of the business, giving us increasing confidence. We reiterate our 580p target price and our BUY recommendation.
The FY21 update shows that trading in Dec’21 continued to follow expectations, therefore, in line with the Nov’21 update, management anticipates FY21 revenue of £667.2m (c.2% light of our forecast), but PBT “slightly ahead of market expectations” (i.e. over £35m). UK and Europe performed well (+16.5% / + 15.1% respectively LFL). Early FY22 trading “has been encouraging”, with industry-wide supply issues and inflation both being mitigated. The new CEO search is in its “latter stages”, and banking facilities to Oct'26 have been refinanced and extended. A potential surplus return is being considered, the mechanism and quantum of which are expected to be announced within the final results in Mar’22, alongside the proposed 2021 final ordinary dividend. Actions taken under the business change programme helped to improve operating efficiency and operating margins during the year, with cash generation strong. The closing net funds position was in excess of £53m (18%+ ahead of our forecast), “comfortably above the Company’s current capital requirements, which includes increased investment to drive revenue growth and optimise operating performance”. We estimate that, if the company were to return less than one-third of this net cash, it would double the effective yield on the stock to >8% (FY22E). Forecasts unchanged. Valuation: The shares have fallen c.20% from their Aug’21 high, leaving considerable potential upside to our unchanged TP of 620p. We expect that the potential capital return, and the marked difference in valuation with Victoria Carpets (VCP.L (N/R), trading on a significantly higher CY22 PE of 20.3x based on FactSet consensus), should see this gap close in due course. Final results on 9 March 2022.
An encouraging start & capital return Headlam has stated that profits will be slightly ahead of expectations, with the positive margin trend continuing. We expect UK margins to have improved to >6%, with the company continuing to target an increase to 7.5% in 2023. The company has announced that it is considering a capital return given the year-end net funds of >£53m and the strong cash flow profile. We expect a material return alongside a healthy normal dividend. The shares are good value in our opinion given the strong asset backing and as much of the benefit from the business change programme is yet to be realised. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com
Headlam, the UK’s leading flooring distributor, is trading well. The full year pre-close confirms that demand remains firm and input cost inflation headwinds are being managed. Driven by better-than-expected margins, earnings for the 12 months to Dec-21 are slightly ahead of expectations and we are raising our FY21 PBT forecast from £35.0m to £35.6m (+2% upgrade).
PBT FY21E “marginally ahead of current market expectations” - we had upgraded by 17%+ in Jul’21 (see here) - while revenue is “tracking broadly in line with current market expectations”. “A robust performance in the residential sector has helped to offset a persisting subdued commercial sector, with other features of the market being the ongoing industry wide supply issues, and associated inflationary pressures, all of which the Company has been largely able to mitigate. Profit performance has been pleasing and reflects the previous and ongoing actions to improve operating efficiency and margin. As a consequence, the Company expects to deliver underlying profit before tax for the year ending 31 December 2021 marginally ahead of current market expectations”. Changes to forecasts: we leave forecasts unchanged at this time. ESG update: Headlam outlines details of actions in each of the three constituent ESG areas, such as a 9%+ reduction in fleet numbers and making half of the non-commercial fleet plug-in hybrids by 2022, plus many other initiatives. Valuation and catalysts: The shares have underperformed in recent months, leaving considerable upside to our unchanged TP of 620p. We expect that the ongoing robustness of the Residential market, and the marked difference in valuation with Victoria Carpets (VCP.L, trading on a significantly higher CY22E PE of 24x based on FactSet consensus), should see this gap close in due course. Pre-close trading update on 27 Jan’22. Prelims “early March 2022”.
Headlam, the leading UK flooring distributor, is trading well. The autumn update confirms that residential demand remains firm and input cost inflation headwinds are being managed. Consequently, earnings are currently trending marginally ahead of expectations. Separately, Headlam has provided an ESG update, which highlights good progress on multiple fronts (notably on reducing its carbon footprint).
Profits marginally ahead of expectations Revenues are broadly in line with expectations and profits marginally ahead, despite supply challenges. The business is looking in good shape with a stronger growth focus and a healthy balance sheet and cash flow. We see potential for capital returns alongside a materially higher dividend. The recent weakness in the shares provides a good entry point. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com
Strong 1H21 revenue recovery to £329.9m (1H19 £335m), +45.2% on 1H20. Gross margins increased to 32.7% (1H20 32.3%) driven by proportionately more higher-margin residential, and 2Q21 inflation. The underlying operating margin at 5.3% was in-line with 1H19 (flat distribution and admin costs due to OIP implementation and restructuring activities offsetting wage inflation and additional costs). Underlying PBT of £16.7m was comparable to 1H19 (£16.8m). Average net funds of £30.5m ex-leases (vs average net debt of £8.6m in FY20) benefited from management’s creditable ability to maintain an inventory position, despite industry-wide supply issues. Resumption of normalised level of dividend payments. An FY21 interim dividend of 5.8p signals, in our view, confidence that the business is on-track to achieve the stated ambition of a 7.5% UK margin run-rate during FY23 through successful delivery of the OIP. Residential trading continues at a “pleasing” level, while Commercial remains subdued. No changes to forecasts. The 29 Jul’21 trading update prompted material P&L, dividend and target price upgrades (see note). Our view: FactSet consensus FY21 PBT has risen by c.20%+ YTD, driving share price outperformance of >25% over that time. July’s CMD revealed an addressable UK market of c.£3bn, supporting strong future revenue growth potential and, while we recognise that short-term headwinds have not fully disappeared (Covid, Brexit readjustment etc.), we see the market opportunity as significant and the OIP as a strong margin driver. Valuation and catalysts: We restate our Buy recommendation and DCF-derived target price of 620p.
On-track for full year The 1H results were in line with expectations of a strong recovery vs last year. LFL revenue was +45.2% vs 1H20 and in line with 2019, with profits also at a similar level to 2019. We upgraded our FY forecasts by 20% post the July update and make no further changes today. The business is looking in good shape with a stronger growth focus and a healthy balance sheet and cash flow. We see potential for capital returns alongside a materially higher dividend. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Headlam, the leading UK flooring distributor, has delivered a robust first half performance. Given the detailed pre-close the interim results provide no material surprises, although we are encouraged by the 5.8p interim dividend. Top-line trends remain firm, with 1H21 revenues in line with 1H19 levels. Moreover, the self-help initiatives highlighted at the CMD are clearly delivering operational improvements. We retain our FY21 revenue and earnings forecasts.
1H update and material upgrades LfL revenue was +45.2% vs 1H20 and in line with 2019 and July has started in a similar vein. With margins improving and some visibility on the important summer period for the commercial business, the company now sees underlying PBT being not less than £35m, which is >20% ahead of consensus. We are increasing our 2021E EPS by 25% and 2022E by 21% and increasing our target price from 550p to 670p. We see potential for capital returns alongside a materially higher dividend. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 3-page note
Headlam, the leading UK flooring distributor, has delivered a robust pre-close update. Top-line trends remain firm, with 1H21 revenues in line with 1H19 levels. Moreover, the self-help initiatives highlighted at the CMD are clearly delivering margin improvement. Consequently, management now believes full-year earnings will be “materially ahead” of current expectations and we are raising our FY21 PBT forecast from £29.1m to £35.0m.
1H’21 revenue was in-line with 1H’19, and 45.2% ahead of 1H’20, which was significantly affected by COVID (all announced at 1 Jul’21 CMD). Performance improved through the period, with initial soft trading in the first two months being followed by “good monthly performances”. Residential was strong throughout, with the weak Commercial sector curtailing overall performance to H1 2019 levels. However, this weakness continued to be recouped throughout the period, and in June 2021, commercial sector revenue was only 3.2% below June 2019. July 2021 has traded in-line with July 2019 prior to entering the traditionally busy summer period for refurbishment activity within the commercial sector. Given this sustained year-to-date performance and the traditional second-half revenue weighting, management now expects full year performance to be materially ahead of current market expectations, with FY21 PBT being not less than £35m. Resumption of dividends: The statement notes that as a consequence of the trading performance above, the strong balance sheet, and confidence in the prospects for the business, the company will return to a full dividend payment based on earnings. We raise our DPS forecasts accordingly (2x covered). Changes to forecasts: Revenue / PBT / DPS: FY21E: £680m (prev. £632.1m) / £35m (£29.8m) / 15p (10p). FY22E: £712.4m (£651m) / £41m (£34.1m) / 18p (14p). This now puts HEAD on an FY22E yield of >3%. Valuation and catalysts: We raise our TP to 620p and reiterate our Buy on the shares which have remained flat since the 1 July CMD that revealed an addressable UK market of c.£3bn. Our methodology remains unchanged: a 4% CAGR gives HEAD only c.29% of its addressable market (currently 20%) and would deliver material upside in the share price. Interims on 2 Sep’21.
Multiple growth drivers. The addressable UK market is £3bn, of which HEAD currently has c.20%. This market is expected to grow “slowly” and HEAD is the market leader, with >6x the market share of the nearest comp. Multiple examples were given of how better sales practices can accelerate top line growth. A picture was painted of a business that was historically sub-optimal, inefficient and old fashioned. We assume a sustained sales CAGR of c.3% to 2030E; but this figure could double if HEAD can use its leadership position and other drivers (i.e. Trade Counters, Digitisation and the material opportunity with Multiple Retailers) to drive market share to only 30% over an analogous timeframe. Portfolio. Continuing European operations were not part of the CMD content (Swiss business disposed May’21) and the remainder will contribute <6% of FY21E EBITA, in our view. In due course, our view is that the margin enhancement and greater focus afforded by a purely UK-focussed operation would make the business cleaner and more attractive to investors. Cost base reduction. Network Consolidation and Transport Integration were showcased in detail, with multiple examples of how sustainable cost savings have been delivered to date, with more to come. Financial targets. HEAD targets c.150% revenue growth in Trade Counter by 2024 (required capex = c.£20m) as it fills the gap in the market for a “truly national offering”. We believe the c.7.5% target margin for the UK business may be achieved sooner than 2023, and may then be exceeded, assuming the Operational Improvement Programme delivers more than c.£8m of cost savings. Valuation and catalysts. We raise our target price by +c.7% to 567p (implying a 27% UK market share), but see a plausible blue sky value of 700p+ (suggesting a 40% UK market share). Trading update on 29 Jul’21.
Revving up The focus of the CMD (click here for presentation) was on drivers for revenue growth, which comes after a five-year period of static revenues due to the transition of the business model, moribund RMI market and loss of sales with B&Q. Headlam laid out the key elements to improve growth – broadening the customer base, roll-out of trade counters and B2B ecommerce. The company also suggested that the 7.5% margin target is a staging post rather than an end mark. Successful execution would significantly improve the investment case, profits and the rating. We see material upside given the prospect of strengthening markets, improving performance and strong cash generation. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 5-page note
CMD & positive trading update The company is holding a CMD in Ipswich today, where we expect to hear more details on the cost-reduction programme and revenue opportunities. Headlam’s UK sales have not grown for five years, but if this changes it would materially alter the investment case. We are Buyers of Headlam as the floorcovering industry is seeing a strong and sustained recovery and as margins are expected to return to 7.5% in the UK helped by c.£8m of cost savings. This means that forecasts are likely to be materially too low. The positive momentum is continuing with adjusted revenue now in line with 2019 and +46% of 2020. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Developing a growth strategy We are Buyers of Headlam, as the floor-covering industry is seeing a strong and sustained recovery, and as margins are expected to return to 7.5% in the UK helped by c.£8m of cost savings. This means that forecasts are likely to be materially too low. In addition, the company has net cash with a healthy free cash flow. What we have not considered as yet is the potential to deliver top-line growth. Headlam’s UK sales have not grown for five years, but if this changes it would materially alter the investment case. More to be revealed at the CMD in Ipswich on 1 July. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 3-page note
Positive AGM update Sales trends continue to improve with overall revenue +30.6% for the first four months and only slightly behind 2019 levels. May has also started well and sales should soon start to trend ahead of 2019 levels. This is being driven by the improvement in the residential sector. Commercial has been weak ytd, but is showing signs of improvement. We are not changing numbers at this stage but a continuation of the current trends would deliver material upgrades. The shares continue to look good value to us, particularly given the potential from the operational improvement programme. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com
Headlam, the leading UK flooring distributor, is increasingly benefitting from healthy market demand. The AGM update confirms that trading is on an improving trend, reflecting the opening up of the UK economy. Overall trading is in line with "internal expectations" and we are leaving our full-year earnings forecasts unchanged.
A reassuring statement, with “trading in-line with internal expectations” – No change to our forecasts Headlam’s Jan-Apr’21 trading improved throughout the period and was “in-line with internal expectations”. Revenue for the period was up +30.6% against the 2020 period which was significantly affected by COVID-19 related site closures from late Mar’20, and only slightly below the 2019 comparator despite continuing lockdown measures. March and April 2021 delivered “good performances, with April 2021 seeing a consistent performance throughout the month”. Strong residential sector performance continued to compensate for a weak commercial sector, which has been more meaningfully affected by COVID-19, albeit there was a discernible improvement as the period progressed. Trading to-date in May’21 has continued the performance experienced during the previous two months. Focus improved and ESG strategy published The disposal of the Swiss operation is now complete – allowing HEAD to increase focus on its activities which afford greater opportunity. On 30 Apr’21, we raised our target price c.14% to 532p to reflect this improved focus. The Board has been strengthened with the appointment of Simon King as NED, and management has commenced proposed improvements to its sales operations to allow for more effective sales generation, with a reduction in the headcount resource required. Separately, HEAD has announced an overview of its ESG Strategy, and published an accompanying report at https://www.headlam.com/environmental-social-and-governance-esg/esg-report/esg-strategy-report/. HEAD will provide bi-annual updates on its progress in addressing material ESG issues, with the next update being published in November 2021. Valuation and catalysts We reiterate our TP and Buy recommendation. AGM at 10am today (21 May’21); CMD and trading update on 1 Jul’21 (proposed); ESG update Nov’21
Focus on the core Headlam is selling Belcolor, its Swiss business, to management for £12m. We see this as a sensible move to focus on the core UK operations as it has proved difficult to scale in Europe. Belcolor made a profit of £1.1m last year, so the sale is slightly dilutive. However, we are not changing our numbers as we expect trading to be trending better than our forecasts. We see Headlam as at an interesting juncture, with market trends improving, plenty of self-help on the cost side and initiatives to drive top-line growth. Furthermore, the balance sheet is in good shape and cash generation is improving. We are increasing our target price from 460p to 550p to reflect increased optimism. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Accelerating self-help The FY results were in line with expectations and the current year was resilient given the lockdown. The key news is greater disclosure on the operational improvement plan. This is forecast to deliver >£8m of cost savings by 2022 and accelerate sales performance. The target is to improve UK margins to a run-rate margin of 7.5% during 2023, compared to our current forecast of 6.0% for that year. With a materially improved balance sheet and potential for profit upgrades, we see greater share price upside and increase our TP to 460p. A successful delivery on the strategy could take the shares significantly higher. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 3-page note
Resilient trading and improved balance sheet Current trading is proving resilient, given the latest lockdown, at only -5% ytd. The company also laid out its capital allocation policies, which highlight a return to the dividend list as well as the criteria to potentially return surplus capital to shareholders. The company is also accelerating its cost reduction projects and will lay out details and margin targets with the final results in March. With a materially improved balance sheet and potential for profit upgrades, we see greater share price upside and increase our target price from 425p to 440p. A successful delivery on the strategy could take the shares significantly higher. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 3-page note
2H20 trading showed a strong and sustained recovery to 2019 levels, leading to FY20 revenue of £609.1m, a little above our forecast and only a 15.3% fall on FY19 (cf -30.6% for 1H20). UK residential performed exceptionally well, compensating for Commercial weakness. 2H20 Residential +8.8%, Commercial -17.8%. Europe fell -4.1% for the year, with robust performances in Switzerland and the Netherlands helping to offset weakness in France, which was subject to severe lockdown measures. PBT will be at the top of the £14m-£16m range, and average FY20 net debt was £8.6m (a quarter of the 1H20 level). Year-end net cash at £50.5m has beaten our forecast by an extraordinary 17x, driven, partly, by a £12m VAT deferral and working capital management. Most of the £110m+ facility remains undrawn. Dividend reinstated: management intend to propose an initial nominal ordinary dividend in Mar’21, paid in May’21. A further ordinary dividend will be declared at the interims (Sep’21) “unless exceptional or unforeseen circumstances prevail”. From FY22, target dividend cover is 2x. Changes to forecasts: FY20E revenue rises to £609m per today’s guidance (from £601m); PBT to £16m (from £15m). No changes to FY21E at this stage, except to increase our net cash forecast to £26.5m from £5m. Valuation and catalysts: HEAD’s sustained, 40%+, valuation discount to VCP.L (N/R) appears anomalous, given the close and long-term historical alignment of the stocks’ ratings. We restate our 467p target price for Headlam, which would put the shares on an FY21 PE rating of 15.4x, which would still represent a material discount to VCP’s current rating. Prelims on 9th Mar’21.
Continuation of operations throughout lockdown period in England Headlam confirms that its operations will remain open for the duration of the lockdown period in England, which came into effect today following the passing of legislation by UK Parliament, and which ceases on 2 December 2020. The company intends to continue operating from all its sites, providing a nationwide delivery service, collection service from its trade counter network, and ongoing customer support while prioritizing the safety and protection of its people, customers and necessary visitors to site. All customer orders currently being processed will be fulfilled as normal and, to satisfy customer requirements in-line with normal seasonal demand, the company anticipates continuing to purchase product and increase availability throughout the period. Management notes that it will closely monitor all UK Government guidance and provide any updates as and when appropriate. Catalysts Headlam will provide an update on recent trading on Thursday, 19 November.
1H20 revenue falls -30.6% to £242.1m on flat gross margins: The main P&L and net debt numbers were pre-released in Jul’20, but it is pleasing to note an LBT beat (at -£1.2m) against guidance, and net debt falling to £7.3m at Jul’20 from £22.4m Jun’20. With cash collections “exceeding expectations”, available banking facilities of £110.7m, headroom of £88.3m and extended revised banking facilities covenant tests agreed in Aug’20 for Dec’20, we restate our confidence in the HEAD balance sheet. Forecasts: We placed our forecasts under review in Mar’20 to reflect Covid-19 uncertainty. Today, we reflect the likely FY impact on trading as follows: FY20E sales to £550m (from £728.8m); EBITA £0m (from £43.7m); EPS -5.4p (from 39.4p); Net debt of £20.7m (from net cash of £21.6m). For FY21E, sales to £605m (from £746.8m); EBITA £25.0m (from £46.5m); EPS 22.1p (from 43.9p); Net debt of £9.4m (from net cash of £26.7m). Operational streamlining continues with the new state-of-the-art Ipswich distribution centre completed on budget, and successfully operational in Jul’20. Network simplification, meaningful cost efficiencies, and improvements to customer service are “anticipated through proposed consolidation of further businesses into the Ipswich centre during 2021”. Management have also accelerated Operational Improvement Plan projects, including planning for the further roll-out of the transport integration project expected to create “significant cost savings” once fully implemented. Valuation: We reduce our target price to 370p from 595p. Our new TP would put the shares on an FY21E PE of 16.7x. This is broadly in line with the current FactSet consensus FY21 rating for peer Victoria (VCP.L).
Reopening begins cautiously Although still unable to provide FY20 guidance (our forecasts / TP remain under review), management note that it has taken a demand-led and phased approach to reopening its UK operations following the closure of all of its UK sites (ex-Coleshill) on 24 March 2020. All principal distribution centres in the UK are now open on a limited basis. Sites and delivery services will continue to be opened up more fully as the demand profile builds, including in response to the reopening of retail businesses. Headlam has strict controls in place ensuring that as sites have reopened, and continue to reopen more fully, operating costs are aligned with the developing revenue profile to manage costs to the lowest possible level. They further note that they have and will continue to ensure, that Headlam follows all UK Government guidelines and the relevant Continental European guidelines relating to safety and protection of its people, customers and suppliers. Revenue performance since Mar’20 In the UK (c.85% of FY19 revenues), since 25th March, revenues have run at c.10.4% of internal revenue expectations. For the last five trading days, led by increasing demand, this has risen to c.28.8%. 80.5% of the company’s UK workforce are currently furloughed, compared with 87.6% on 11 May 2020 as sites have reopened reflecting demand, and continue to be paid an enhanced form of the UK Government's Coronavirus Job Retention Scheme. Continental Europe (c.15% of FY19 revenues) has traded better at c.66.8% of internal revenue expectations. For the last five trading days, this has risen to approximately 75.5%, with the recent lessening of restrictions in France being a key driver. A minority of the Company’s French and Swiss workforce are currently subject to the two countries’ equivalent of the UK Government's Coronavirus Job Retention Scheme. The Dutch workforce has operated at full capacity throughout the period. The Operational Improvement Programme Management, whose aim is to drive both revenue and margins is continuing / accelerating. Examples include enhancing fleet utilisation, the trade counter proposition, and e-commerce capabilities. CONTD OVER…
COVID-19 update: div. suspended, expect downturn in orders
FY20 trading and outlook – “imminent and meaningful downturn” expected Headlam’s statement this morning notes that most of Q1’20 has been “reasonably resilient, and broadly in-line with that of 2019”. However, management now expect an “imminent and meaningful downturn in orders. As the overall impact on demand and over what time period is not yet known, it is not currently possible to provide guidance on the expected outturn for the financial year ending 31 December 2020””. A further announcement will be made when the Board has more clarity. FY19 dividend suspended FY19 dividend of 17.45p is suspended (saving £14.6m cash outflow) The Board is “committed to providing dividend income to its shareholders, and dependent on prevailing conditions at the time, the Board will consider an appropriate augmentation to the 2020 interim dividend that is normally declared at the time of the Company’s interim results announcement and payable in January of the following year. Alternatively, and subject to trading in the final quarter of 2020 and other prevailing conditions at the time, the Company may consider the declaration of a special dividend.” Strong Balance Sheet and significant liquidity headroom Average FY19 net debt was £3.3m (£27m net cash at Dec’19) £109.7m of total banking facilities at Dec’19 (94.1% undrawn at that date) In Aug’19, banking facilities were extended from Dec’21 to Apr’23 Headlam also has short-term uncommitted facilities of £25m (renewable annually) Largely freehold property portfolio with minimal lease commitments. PPE assets of c.£115m at Dec’19 Forecasts under review We place our forecasts under review until greater clarity is available. Continued over ….
FY19 prelims – first take
In-line FY19 despite a tough year: Revenue / PBT / EPS each in line with our (consensus-level) forecasts at £719.2m (+1.5%) / £39.5m / 38.6p, despite a soft market backdrop and weakness in the UK residential sector. LFL revenue +0.3% and +3.2% in the UK and Continental Europe. GM down 40bps to 31.9% reflected the previously guided mix-shift to commercial as a result of market conditions, and good discipline shown on admin and distribution costs, which were flat as a proportion of revenue. Strong cash conversion (post IFRS 16) at 107%, leaving net cash of £27m post a £13.4m investment in the Ipswich facility. DPS flat at 25p per guidance. Ongoing revenue and margin initiatives include the successful roll-out of IM system in FY19, and the £26m Ipswich RDC on track for an Apr’20 launch. Current trading and outlook: No impact so far from COVID-19; trading to date (FY20) has been “marginally below the Board’s expectations”, but management still expects a “modest improvement compared with 2019 as advised in the January 2020 Pre-Close Trading Update”. We leave our forecasts unchanged for the time being, expecting sales / EPS growth of >1% / >2% respectively in FY20E. Valuation: We restate our unchanged 595p target price (PE 15.1x). The shares currently sit at a c.8% discount to their long-run PE median of 13.2x for a 5%+ yield and £27m of net cash on the balance sheet, in addition to an attractive UFCF yield of c.10% for FY21E. Our TP DCF requires sustained sales CAGR / margins of only 2% / 5.5% respectively. We expect a trading update in May’20.
UK CBI manufacturing orders beat estimates for Feb; Taiwan revises down export growth in Feb due to coronavirus; Japan manufacturing PMI falls
HEAD HILS JHD OXIG RSW RNO SCPA ZTF SOM GHH
FY19 marginally ahead; modest improvement expected in 2020
2019 slightly ahead: 2019 is to be slightly ahead of consensus, which stands at £705.5m and £39.3m for revenue and underlying PBT respectively (we were slightly ahead of consensus with PBT of £40.0m). As previously flagged, the dividend will be held at 25p despite the y/y reduction in profit. IFRS 16 is expected to reduce PBT by c£0.8m for the full year. UK LFL modestly positive: the soggy trading seen in the UK through the first half continued in H2, with modestly positive LFLs and a continued shift to commercial. As expected, the smaller Continental European business had a stronger LFL revenue performance. Ipswich on track: Headlam continues to invest in capex to support future growth and efficiency measures. The new distribution centre at Ipswich is on plan and should be operationally complete by Easter. Progress in 2020: a (prudent) 2020 outlook points to ‘a modest improvement’ versus 2019 with capex investment and cost inflation largely offsetting early-stage contributions from efficiencies. The dividend should also return to growth in 2020. We are modestly tweaking our above consensus PBT forecasts down by 1% (our forecasts are pre-IFRS 16). Valuation & recommendation: in-line with other UK focused stocks, the shares have re-rated markedly over the last 2 months, bringing multiples back to a level more in keeping with historic averages, on FY20e EV/EBITDA and PE multiples of 8.9x and 13.5x. The dividend yield remains a key attraction at just under 5%, and with the prospect of a stronger recovery in profit in FY21e, we maintain our BUY rating and raise our price target to 595p. Next news: FY results, 5 March.
Eurozone confidence rises in December, US non-res lead indicator rises again, Airbus CEO pledges commitment to UK
UK Construction PMI beats in Nov but remains in contraction; UK manufacturing wage costs rose in Q2, United Airlines switches from Boeing to Airbus
We make small updates to our forecasts, posting a +0.5%/-2.6% change to our FY19/20e PBT estimates to reflect the recent H1 19 interims and IFRS 16 changes. We retain our Neutral stance given the absence of definitive near-term catalysts. IFRS 16. We update our numbers for IFRS 16, which sees a £0.9m tailwind to FY19/20e op. profit, but a £0.8m headwind to PBT (double the ~£0.4m impact incurred in H1 19).
Consumer activity less predictable: The historical link between household consumption expenditure and disposable income growth and supermarket revenue growth broke in Q318 and has remained so in the subsequent quarters. While disposable income has been growing and the wealth effect is seeing UK consumers spend more (the savings ratio has been falling), not only has this spend not been in the supermarket sector, it has been disproportionately less. While this gives cause for concern for the sector in the run up to the second Brexit deadline, we believe any impact to revenue will be under 5%. Tariff and supply chain issues manageable: Adding to the uncertainty on consumer spending activity are concerns over tariffs, supply chain disruption and possible labour shortages. That said, on tariffs, we note that while any imposition of tariffs will be widely reported, in individual consumer terms they will have little impact on shopping costs (up 4%). Similarly, while disruption to the supply chain could lead to shortages, particularly in fresh produce, which will draw media attention, we believe that the disruption will be temporary in nature (2% hit on revenue), with a new supply chain timescale quickly established. The sector is not directly affected by labour issues Kantar a useful guide: Kantar Worldpanel data provides useful monthly insights into market share and revenue growth of the main players in the UK supermarket sector, which otherwise would be difficult to obtain. That said, given that Sainsbury’s maintains that the data collected omits 20% of its revenue, we have compared the Kantar monthly data with the quarterly revenue growth numbers provided by the publicly-quoted companies. This illustrates that the Kantar market snapshots give a fairly accurate assessment of Tesco’s progress. The correlation with reported numbers is lower for Sainsbury’s and there is low correlation with Morrisons reported numbers. It would appear that the smaller the company’s market share, the less accurate the monthly growth numbers. Supermarket sector oversold - Buy: While share price weakness in stocks with UK exposure is not unexpected as the second Brexit date approaches, we believe that the supermarket sector in particular has been oversold, possibly on the un-quantified risks discussed above. We believe that it is, therefore timely to either be positioning to buy into or increase positons in the sector in anticipation of a conclusion to, or greater visibility on, Brexit. We upgrade Morrisons to Buy from Hold with a PT of 240p (up from 230p) while retaining our Buy call on Tesco (PT up to 270p from 255p) and Sainsbury’s (PT up to 280p from 265p). On valuation, we retain Ocado on Sell on an unchanged PT of 880p.
HEAD FSJ MRW OCDO SBRY SMWH TSCO
Solid interims: H1 revenues rose 3.3% y/y (+2.0% LFL) to £348.7m, while operating profit was essentially flat y/y at £18.1m (including a £400k benefit from IFRS 16). Underlying PBT of £17.0m fell 4% y/y after including a c.£400k net headwind from IFRS 16. The group’s net cash balance ended the period at £32.5m (H1 18: £16.0m). Moving parts: the gross margin was flat y/y at 32.5% as negative mix shift (i.e. to commercial) was offset by inventory build and higher-margin sales. However, the drop through from revenue growth was reduced further down the P&L by cost inflation (flagged in January), translating into a 20bps reduction in the underlying operating margin to 5.2% (H1 18: 5.4%). Operational efficiencies: measures taken in 2018 had a modest impact on profit, but the group continues to progress initiatives that should start to deliver benefits from 2020. Construction of the new Ipswich distribution centre has commenced, and this remains on track to be operational for Easter 2020. Outlook in-line: following on from a solid H1, management is maintaining FY guidance (adj. PBT of £39-41m). The business is traditionally H2 weighted and Brexit remains a material uncertainty, but at this stage Headlam has left itself less to do in H2 than has been the case in prior years. Interim dividend maintained: the interim dividend is flat y/y at 7.55p, in-line with management’s commitment to holding the dividend through a tougher 2019. Attractive valuation & yield: the shares have had a weak 3 months (-13%), translating into FY19e EV/EBITDA and PE multiples of 7.0x and 10.9x – and a dividend yield of 6.0%. The in-line outlook is likely to be well received near-term, and beyond this, there is scope for recovering LFLs and delivery on cost-cutting to drive the multiple back towards historic averages (1-year forward PE c.13x).
Headlam’s interims are 3.8% ahead of our estimates at the PBT level (excl. IFRS 16 effects), largely due to an 80bps beat in gross margins, reflecting better volume and the impact of higher-margin acquisitions, despite adverse mix. H2 19 trading has commenced with “small” LFL revenue growth, suggesting stabilisation in trends with Board expectations left unchanged. We retain our Neutral recommendation.
Headlam will release their H1 19 results next Wednesday. We update our model for the 3.3% y/y top-line growth in H1 per the July pre-close, and forecast H1 19e adj. PBT of £16.7m (down 5.6% y/y given adverse margin mix from stronger Commercial) and adj. EPS of 16.2p. We expect management will re-affirm FY expectations at this stage (PBT of ~£39-41m), though positive commentary on the start of H2 trading will be a key area of focus in our view given the seasonal weighting. We retain our Neutral recommendation and 470p PT.
Headlam has announced that the sod-cutting ceremony for its upcoming regional distribution centre in Ipswich is taking place later today, marking the start of the construction. In our view, we consider this to be a reconfirmation for investors following the pre-close update earlier this week which had indicated that construction was about to commence this week. We look forward to further updates on progress in coming months, as well as estimated cost savings from utilising a larger site. We leave our forecasts unchanged (which already account for the CAPEX spend), and retain our Neutral recommendation.
H1 LFL +2.0%, outlook in-line: this compares with LFL of +3.5% for the first 4 months, but the implied slower May and June is more a function of the comparatives (which arguably flattered Q1, particularly in the UK) than underlying trading – trading conditions have been broadly similar across the first 6 months. As per earlier in the year, Continental Europe continues to see better growth than the UK, and commercial is stronger than residential. The outlook statement is in-line and we make no change to forecasts. H1 UK LFL +1.8%: this compares with +3.1% for the first 4 months; Q2 was ‘marginally positive’. Commercial and residential are both in positive territory, but the modest mix shift to commercial has continued (which is factored into our forecasts, i.e. we assume mix reduces the gross margin slightly this year). H1 Continental Europe LFL +3.2%: the region has continued to benefit from actions taken over the last year and a half, particularly in France. Ipswich & cost efficiency measures on track: Ipswich is on track, with a continued expectation that it should be operational in mid-2020; the fleet utilisation trial in South Wales has been a success and is a likely precursor to other group-wide initiatives. IFRS 16: as for the wider sector, IFRS 16 will feature at the interims and is likely to reduce PBT modestly – this is a non-cash item with no impact on the dividend. Valuation & recommendation: Headlam continues to make steady progress against the backdrop of soggy end markets. The valuation arguably prices in ‘Brexit uncertainty’ (FY19e PE 11.6x & EV/EBITDA 7.5x are some 10-15% below 5-year averages) – and certainly appears not to be factoring in the potential for any recovery. A dividend yield in excess of >5% (and underpinned by net cash on the balance sheet) is an added attraction. BUY.
Headlam has released a pre-close trading update ahead of its interims next month, with overall expectations for the full year maintained. We make no changes to our forecasts at this stage, and retain our Neutral recommendation.
Headlam has released a positive AGM trading update for the first 4 months of the year, showing signs of stability in underlying markets. We leave our forecasts and Neutral recommendation unchanged as we await for further updates through the year.
We upgrade from Sell to Neutral and set a 470p PT (6% upside, 12.4x P/E, 11.5x P/E ex. net cash) as we see current levels offering a more balanced risk-reward profile in light of recent newsflow. Though we continue to believe that there is some downside risk to earnings, we acknowledge the potential for a better-than-expected outlook led by i) a more positive (but still cautious) tone from Kingfisher (owner of B&Q, Headlam’s largest customer), ii) recent economic data showing the UK consumer holding steady and iii) concrete evidence from Headlam’s FY18 results of the delivery of planned efficiency savings. We make small changes to our FY19E numbers following the March results, and also publish FY20E forecasts, with further details set out later in this note.
Headlam have acknowledged that soft trading conditions experienced in H118 are likely to persist over the second half. Whilst the impacts of this are to some extent offset by firming gross margins, this has prompted guidance to the lower end of current market expectations; our “bottom of the range” PBT forecast of £43.5m is unchanged. Ultimately, the flooring market is driven by replacement spend and Headlam should perform well into any rebound in consumer confidence. However, we expect sentiment will remain subdued given nervousness on consumer spending over the seasonally busy Autumn period minimising scope for a recovery in the share price short term.
The pre-close update highlights a sustained pattern of revenue decline with UK like-for-like decline of 5.5% over H118. Management refer to a soft UK market backdrop affecting revenue in both the residential and commercial sectors and a reduction in orders from its largest customer.
Headlam have confirmed a difficult start to FY18 reflecting the softening UK retail environment and a customer specific issue; organic revenues have shrunk 6.3% in the first four months which is, therefore, still tracking meaningfully behind our estimate of a 2.0% decline in organic UK revenues in FY18. Whilst May has improved and self-help measures will benefit gross returns, we are again trimming our estimates to more conservative assumptions. The key period will, as ever, be the seasonally busy Autumn period and we expect the shares will remain subdued pending confirmation of trading trends in the latter part of the year.
We have reduced our FY18 earnings estimates to reflect a difficult start to the year and taking a more cautionary stance on the UK retail environment in 2018; our revised forecasts now assume a 2.0% decline in organic revenues in the UK in FY18. The tangible benefit of self-help measures to boost gross returns and a more active acquisition strategy on the back of the strong balance sheet will drive operational leverage when trading conditions firm. However, we expect reduced expectations will weigh on share price sentiment short term restricting prospects for outperformance and we moderate our stance accordingly.
Headlam : Pre-close: profits in-line
No change to forecasts following the pre-close update; weakening H217 UK flooring markets have been offset by improving gross margin as self-help measures bolster returns. We recently increased our FY18 estimates to reflect a full year contribution from the Domus acquisition which should provide for double digit earnings growth in the current year. Further acquisitions are possible in FY18 which will drive leverage on investing the group’s strong cash position into strategic income streams. A FY18 rating of 12.5x supported by a yield of 4.9% provides scope for the shares to outperform.
Headlam : Profits in-line, acquisition
Headlam has released a trading update for the ten months to 31 October 2017 this morning. A weaker market backdrop has resulted in the moderation of top-line growth in H2 driven by softening in demand in the UK; despite this FY17 PBT is anticipated to be in line with market expectations thanks to well executed efforts to realise operational efficiencies. Headlam has also announced the acquisition of Domus Group, a leading UK specification consultant and supplier of hard surfaces for £35.4m (8.0x FY16 EBITDA). Whilst not immune to the wider market backdrop, Headlam’s market position, scale and ongoing efficiency initiatives gives it a degree of robustness, enhanced by the announcement of an earnings enhancing acquisition. Headlam currently trades on 12.9x FY17 earnings with an attractive 4.5% yield and a strong balance sheet giving the potential for additional acquisitive growth or further special dividends.
Whilst weakening H217 UK flooring markets have prompted a more conservative top line estimate for FY18 & FY19, the improving gross margin is highly encouraging and, we believe, sustainable; our underlying forecasts are unchanged. We have, however, now adjusted our estimates to reflect a full year contribution from Domus in FY18 which provides for earnings enhancement of 7.5%. We anticipate further acquisitions in FY18 which will drive leverage on employing the group’s strong cash position into strategic assets. A FY18 rating of 11.6x supported by a yield of 5.3% provides scope for the shares to outperform.
Headlam, the leading UK and Continental European flooring distributor, has issued a strong set of interim results, providing extra detail on the positive pre-close update (issued 18th July). Revenues were +4.0% to £342m, with growth driven by expansion in the UK and Continental Europe. Greater collaboration between the business units and the new management style being introduced has resulted in a 103-basis point expansion in the gross margin. Overall Headlam is trading in-line, no change to forecasts. We re-iterate our BUY recommendation (TP 700p).
Today’s interim results follow the recent trading update (July 18th) and confirms that the first six months of the year has been positive for Headlam. Revenue of £341.9m (HY16: £238.7m) was up 4% yoy with Gross Profit increasing 7.6% to £106.m (HY16: £98.7m) on margins 103bps higher at 31.1%. The improvement in margin reflects the on-going efficiency gains made within the business. The operational leverage from revenue growth and improved margins drives an 11.6% improvement in operating profit, as margins increase 30bps yoy, leading to a similar increase in PBT. The interim dividend increases 12.7%, in line with the increase in earnings, to 7.6p. We leave FY forecasts unchanged for now except for a minor increase in EPS on a lower tax charge. The performance in H117 shows Headlam’s continued outperformance against the majority of UK RMI, building product focused businesses. That it has been able to grow both volume and price over the last 18 months is testament to Headlam’s market position and low average value per transaction resulting in good pricing power. In addition, efficiencies offer the potential for continued operational gearing. At last night’s close the shares trade on 13.9x earnings and yield 4.2% with the potential for further special dividends.
H117 results confirm Headlam is tracking in line with our revenue forecasts and current trading supports our top-line assumption of 3% growth in FY17. Returns are being supported by a focus on efficiencies in the business providing firming gross margins; gross margin of 31.1% (+103bps) in H117 is notable and provides scope for the group to challenge our earnings growth assumptions on the upside if maintained in H217. The group is committed to a progressive dividend policy including potential special dividends and the shares are yielding around 6.2% inclusive of our forecast of a further 10p special being declared in respect of FY17. We believe current levels provide an attractive entry point.
In the trading update released this morning, Headlam has reported an encouraging 4.0% growth in revenues for the first six months of the year. This result reflects a positive performance across the UK and Continental Europe and implies a notable acceleration in sales in the final month of H1. Residential demand remains robust in both regions. In its commercial division, UK sales declined in May and June, impacted by increased political uncertainty, whilst in Europe, the declining trend seen in the first four months of the year improved, despite continued underperformance in the Swiss business. Group gross margin increased by an impressive 103 basis points YOY thanks to effective organisation and streamlining of business processes. Trading for the full year remains in line with management expectations and we make no changes to our forecasts today. At current levels Headlam trades on a PER of 13.5x with an attractive 4.4% dividend yield before considering the potential for further special dividends.
Headlam, the leading UK and Continental European flooring distributor, has issued an impressive 1H17 pre-close update. Revenues were +4.0% to £341.9m (PG estimate £342.1m), with growth driven by expansion in the UK and Continental Europe. However, investor interest will be fuelled by the 103-basis point expansion in the gross margin. This achievement reflects the greater collaboration between the business units and highlights the benefits of the new management style being introduced. Overall trading in-line.
In 2016 Headlam distributed over 11,000 miles of flooring, enough to (almost) stretch from London to Auckland (New Zealand). This amazing achievement reflects their number 1 position in the UK, where Headlam connects global manufacturers with predominately independent retailers and specialist flooring contractors. This entrenched position reflects sustained investment over the last decade-plus. However, the new CEO recognises margins have scope to be pushed higher. Based on our benchmarking, we estimate over the medium term earnings could see a 30% uplift (vs FY17 forecasts).
In its AGM statement released this morning, Headlam confirms that trading in the first four months of the year has started well and is in line with expectations for FY17. This builds on a good performance in FY16, which saw forecasts upgraded twice due to strong trading in the second half of the year. In the UK year to date, both residential and commercial sales were higher, despite challenging comparatives. Solid growth in Europe was driven by residential demand whilst the commercial sector was softer, held back by underperformance in the Swiss business. Headlam continues to act as a consolidator in its highly fragmented industry, announcing the acquisition of Scottish based McMillan Flooring Distributors. Our forecasts remain unchanged today but we are encouraged by the positive start made to FY17 trading. At current levels and following strong share price appreciation since December, Headlam trades on a PER of 15.6x with an attractive 3.7% dividend yield, before considering any further special dividends in FY17.
We remain confident that the outlook for UK consumer markets supports our top-line assumption of 3% growth in FY17 and Headlam is tracking in line with our earnings forecasts in the year to date. Returns should be supported by the price inflationary environment and a fresh look at efficiencies in the business providing the prospect of firming gross margins. The group is committed to a progressive dividend policy including potential special dividends and the shares are yielding around 5.6% our FY17 dividend forecast inclusive of a forecast further special being declared in respect of FY17. This is a momentum stock with superior yield.
FY16 has been a good year for Headlam with results in line with forecasts that were upgraded at the time of pre-close trading statement (19th January) which followed the positive revision to estimates post the ten-month trading update (1st December 2016). The performance during the year has been good with growth in both revenue and margin. Revenue in FY16 of £693.6m (FY15: £654.1m) showed 6% yoy growth. This was magnified at the operating level due to the August price increase in the UK, leading to an increase margins during the year of 30bps. The combination of revenue growth and operational gearing lead to c. 15% profit growth yoy. In addition, Headlam has announced its intention to pay a special dividend of 8.0p. This follows the 6.0p special paid in FY15 and is on top of the 9.0% growth in the total dividend for the year. On the total pay-out for FY16 of 30.6p the yield at last night’s close is c. 5.0%. We leave FY17 and FY18 forecasts unchanged post the recent upgrades. On current forecasts and, post the strong run following the December statement, Headlam trades on less than 15x earnings and yields 3.9%, prior to any further special dividends in FY17.
Earnings growth of 15% in FY16 reflects UK organic revenue growth of 4.7%, which was enhanced on the bottom line by the natural operational leverage within the business. Whilst we are not changing our PBT forecasts further to the 8% upgrade in January 2017, we believe our estimates are conservative and that the sensitivity is on the upside. Recent management changes will allow a fresh look at efficiencies in the business and this should provide scope to further enhance returns medium term. On a rating of 14.4x and forecast yield of around 6.0%, including the special dividend, the investment case remains compelling for both growth and income funds.
Strong trading in the last eight weeks of the year lead to further upgrades to forecasts, this follows the upgrades put through at the time of the ten-month trading statement on December 1st . Revenue forecasts increase slightly, c. 1.0%, in FY16 to £693.5m (prev. £689.0m), showing 6% yoy growth (FY15: £654.1m). This is magnified at the operating level due to the August price increase in the UK leading us to increase margin assumptions at the operating level by 30bps. As a result, PBT increases 7.0% to £40.1m (prev. £37.5m) and equates to c. 13% yoy growth. Our FY17 revenue forecast increases to £710.8m (prev. ££695.9m) and, again with the benefit of operational gearing, leads to a 10.7% increase in PBT to £42.7m (prev. £38.6m). FY18 forecasts remain conservative with just 1.0% revenue growth assumed but the flow through from the higher base in FY17 means earnings forecasts increase c. 10%. Despite wider equity markets having been buoyant, Headlam shares are up only c.2% since the increase to forecasts in December. Post today’s upgrade, the shares on just 12.0x FY17 earnings and offer a 4.4% yield. Appealing, considering Headlam’s best in class performance during the year.
We have increased our FY16 earnings forecast by 6% to reflect a strong Q416 for both residential and contract flooring businesses. Further to today’s upgrade, the shares now trade on a FY16 PE of 12.7x and a total yield of 7.5% as we now anticipate the special dividend will be triggered. Headlam shares have moved sideways over the past 18 months despite meaningful earnings growth implying a steady de-rating. Recent management changes will allow a fresh look at efficiencies in the business and this should provide scope to enhance the natural leverage in FY17 & FY18. The investment case remains compelling for both growth and income funds justifying our conviction Buy stance.
Headlam (Europe’s largest flooring distributor, not under coverage by PG) has announced that underlying earnings for FY16 will be ahead of consensus estimates (only revised higher in Nov-16). The outperformance has been helped by the acceleration in private commercial activity, highlighting the increasingly healthy business trading environment in the UK.
Economic Data
The ten-month trading statement released this morning indicates that trading has remained solid post the interims and FY16 results will be ahead of market expectations. As a result, revenue forecasts increase 2.1% in FY16 to £689.0m (prev. £674.9m). The August price increase on stable volumes lead to increased margin assumptions magnifying the impact on profitability with PBT increasing 4.2% to £37.5m (prev. £35.9m). Conservatively, FY17 and FY18 forecasts increase in line with previous growth assumptions off the higher base in FY16. This approach is prudent in the face of continued currency volatility and low visibility on UK consumer spending into FY17. The referendum could have been a major headwind with c. 60% of COGS sourced in Euros. That Headlam has been able to offset the impact with price rises that have had little impact on volumes highlights the resilience of the business model and its market leading position in the industry. Looking forward the UK consumer will remain key to its performance. However, forecasts assume just 1% revenue growth in FY17 and FY18 and operating margins remain well below the historic peak offering the potential for operational improvements to offset any top line weakness.
Revenue growth of 5.2% in the year to date reflects sustained replacement-driven demand for flooring in the UK enhanced by a inflationary price environment from August 2016. This has created a positive trading environment for Headlam reflected in another profit upgrade today and enhancing the prospects for a sustained earnings upgrade cycle in 2017. The shares are trading on 12.6x conservative FY17 earnings and offer a potential total yield of around 8% should the special dividend be triggered which, we believe, is the balance of likelihood. Headlam remains a conviction Buy at current levels.
As indicated in the recent trading statement (12TH July), Headlam has performed well in the first half leaving the business well positioned to meet FY expectations. Revenue increased 4.8% to £328.7 (HY15: £313.5m) with both the UK (+4.3%) and Europe (+8.7%) attaining good growth. Margin improvement in H1 has been better than anticipated when compared to expectations for FY16. The 50bp yoy improvement in margin in H1 combined with the good revenue outcome drove an 18.5% increase in operating profit to £15.4m (HY15: £13.0m). Forecasts assume a 10bp decline for FY16, but the performance in H1 provides confidence when looking forward. Historically profit is H2 weighted due to the important summer and winter trading periods for the commercial and retail markets, respectively. As a result, forecasts remained unchanged acknowledging the importance of H2 trading to profitability. This includes the dividend with the FY estimate of 21.5p unchanged, despite the interim dividend increase of 11.7% to 6.7p (HY15: 6.0p), above the 4% assumed in forecasts.
Earnings growth of 23% highlights a sustained strong performance within the UK flooring market in H116 which, alongside the inherent leverage within the business, provided for a jump in operating margin from 4.2% to 4.7%. Revenues are holding up well in July and August to date and our forecasts appear conservative, providing the prospect for upward revision if growth trends are maintained in the key autumn sales period. The shares have steadily de-rated over the past two years and now trade on a PE of just over 13x and a possible total yield of around 8% if the special dividend is triggered; we believe this is the balance of likelihood given current trading. We are confident these fundamentals provide significant scope for share price outperformance and reiterate our Buy stance.
Headlam's H116 trading statement indicates that trading remained solid throughout the period with total revenue increasing 4.8%. Forecasts currently assume just 3.2% in FY16. Despite the strong H1 performance, forecasts are unchanged acknowledging the turbulence the recent referendum result has had on currency markets and its potential impact on consumer and commercial markets in both the UK and Continental Europe. Interestingly, the mix change since the start of the year has been significant with UK like-for-like slowing to 3.4% as residential has slowed, from a very strong start to the period, but with commercial experiencing like-for-likes turning from negative in the first few weeks to positive by the period end. This bodes well for the important summer period in commercial sales. In Europe, constant currency revenue growth has increased during the period to 2.8% against, what had been assumed to be optimistic, FY expectations of c.1.0%. Post the recent share price decline, Headlam trades on 12.9x PER and yields an attractive 4.9% on a balance sheet that remains conservative with an estimated net cash position of c.£43m at the end of FY16.
Headlam has issued a trading update for the six months ended 30 June 2016. Group revenues were 4.8% ahead in H116 driven by a strong performance within residential markets partly offset by flatter trends for commercial activity in the period. This represents a slight acceleration in the revenue growth rate given Group revenue was up 4.5% in the first four months.
This morning’s AGM statement indicates that trading during the first four months of the year has been good. This follows on from the FY15 results announcement, (3rd March), when the company indicated that the current financial year had started well. That this has continued, albeit at slightly lower level than witnessed in the first few weeks, provides increasing confidence with regards the outcome for FY16. We leave forecasts unchanged this early in the year but acknowledge that the 4.0% like-for-like performance in the first four months is ahead of our assumed 3.5% growth in the UK for FY16. In addition, the statement alludes to positive movement in margins in the early part of the year. The shares currently trade on 14.9x FY16 earnings and yield 4.3%. Attractive in the context of its market position, good trading and the potential for further special dividends.
FY15 earnings were ahead of expectations reflecting improving returns as gross margins increased from 30.0% to 30.7% partly driven by strong Q415 rebates and improved buying terms with suppliers. With the capex cycle nearing conclusion, the group is generating strong cash flows and year end net cash increased from £24.6m to £43.9m. This provided for an 18% increase in ordinary dividend as well as a special dividend of 6p for the 2015 year, a total yield of 5.5% at the current share price. Subject to a net debt: EBITDA cover of 0.5x, this dividend policy is sustainable medium term. Alongside the prospect for earnings upgrades given modest forecast assumptions, we believe the investment case is compelling and anticipate a period of sustained outperformance over the coming year.
As indicated in the trading statement in early December, revenue of £654.1m was 3.0% ahead of the previous year (FY14: £635.2m) and in line with forecasts. Gross profit improved 5.2% to £200.5m (FY14 £190.5m) and came in ahead of our of £197.9m estimate due a 70bp yoy improvement in margin. This was magnified at the operating level leading to growth of 16.9% to £36.8m which was c. 7.5% ahead of forecasts. The better than expected profit performance combined with a good performance in working capital leads to a net cash position at year end of £43.9m (FY14: £24.6m) materially ahead of our c. £31.0m forecast. The total ordinary dividend for the year increases 18.3% to 20.7p (FY14: 17.5p) and mirrors the growth in EPS. In addition, Headlam has announced its intention to pay a special dividend of 6.0p in April 2016. Combined with the ordinary dividend the total FY16 return to shareholders is 32.6% ahead of our forecast.
The trading update for the 11 months to end November 2015 highlights trading in line with our forecasts which are unchanged; we raised our FY15 PBT forecast at the interim stage which equates to forecast earnings growth of 10%.
Headlam has announced that trading for the first eleventh months of FY15 has been good and is on course to meet expectations. On our forecasts, revenue will be +2.9% ahead YoY leading to growth in profitability of 8.8%. The strength in trading across the year has been reflected in the share price that has appreciated strongly (+20%). Whilst the current PER rating of 16.6x is near the historic through the cycle peak the operating performance during FY15 suggests that earnings will continue to be driven by operating margin expansion. Forecasts currently assume just 20bp improvement annually but still remain materially below the historic peak. As a result, the share price will be driven by earnings outperformance and further acquisition activity.
Headlam has a unique and dominant position within the fragmented UK floor coverings market and is the largest distributor in Europe. Its model allows independent operators in both the commercial and residential space to compete in terms of product offering, price and service with the large multiples. CAGR in revenue over the last 20 years has been 9.1% with operating profit having grown during the period from £5.0m to £46.0m in 2007, declining with the market contraction in 2009 to £24.5 million and since then, recovering to £31.5 million last year. Historically Headlam has grown ahead of the market through a combination of acquisitions and organic growth and is well placed to continue that trend as it continues to consolidate the UK distribution market. Organic growth will be underpinned by a recovery in the floorcovering market that remains 17.3% below the level achieved in 2007. On current year estimates Headlam is trading on 16.7x PER and an EV/EBITDA of 10.4x. In addition the shares offer a dividend yield of 3.9%.
H115 results highlight strong Q215 momentum within the core UK business; like for like revenue growth of 5.4% highlights a strong May (+8.2%) and June (+6.3%) period thereby outpacing like for like revenue growth of 4.5% in the first four months.
The Headlam AGM trading update highlights good progress in the core UK market with like for like revenue growth of 4.5%; we note this is tracking ahead of our 3.0% like for like growth assumption (i.e. organic growth stripping the £4m revenue contribution from Mattys’s which was acquired in February 2015).
2014 results in line with year end trading update guidance and numbers in line with expectations.
Headlam have acquired Matty’s Wholesale Carpets for a maximum consideration of £2m. The business is a distributor of residential floorcovering based close to the group’s service centre in the centre of Birmingham.
Headlam management confirm Q414 trading supports market forecasts and earnings “are likely to slightly exceed the group’s internal performance target”.
