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Travis reported 2022 EBIT that was 8% below our expectations or 4% below if property profit and a one-off restructuring charge are excluded. Looking to 2023, management anticipates delivering a performance in line with market expectations, although we reduce our EBIT forecast by 3% (EPS: -5%). Whil
Travis Perkins plc
We have downgraded our forecasts following Travis Perkins’ FY22A results and now expect FY23F adj. operating profit of £281m (previously £333m), which rises to £312m in FY24F and £333m in FY25F. Our FY24F adjusted EPS of 97p is actually c.13% below the 111p delivered five years previously in FY18A, despite a series of corporate actions designed to enhance shareholder value. Our current fair value estimate is c.850p per share (16% downside). SELL
Travis Perkins’ FY22 performance was below AV and market expectations. While lfl sales grew 6.6% yoy, volume declined by 6.0% during the year and the Group’s adjusted operating profit was 7.8% below consensus, largely due to losses in the Toolstation banner. While the management has said that it is comfortable with the 2023 consensus, we will trim our FY23 estimates to factor in continued weakness in the UK private section (new build and RMI) and in Toolstation Europe. Our positive recommendation is likely to be maintained.
Travis is doing a lot of sensible things, continuing to invest in the core business, rolling out Toolstation and looking to add more value-added service where possible. However, with a tough macro backdrop, strong YTD performance and lack of positive catalysts we see better value elsewhere, and downgrade to Hold.
After a decent rally (+18% YTD), Travis trades on 11.6x CY23E PE and 6.7x EV/EBITDA, with a 7.6% FCF yield. This is a slight discount to the 10-year average of 12.2x. Given the macro backdrop and lack of obvious catalysts for a re-rating, we would not be surprised to see some profit taking here.
Travis pointed to a resilient Q3 performance augmented by an acceleration in price inflation and a focus on the cost base. Consequently, management guides to EBIT around the middle of the current range of market expectations (£304-340m). We therefore reduce our 2022 EBIT estimate by 1% to c.£322m,
Travis Perkins’ recent update showed continued resilience in Q3, as its larger customers remain busy and Toolstation returned to growth. We have reset estimates for 2023 based on a 7.5% volume fall in 2023 for Merchanting (from zero), assuming 20% lower housing transactions, and 10% lower housing starts. We expect the housing market to soften on raised mortgage rates and consumer confidence. Travis has a good track record of cutting overheads in times of falling demand and it can reduce inventories and rein in capex to protect an already strong balance sheet. We see around 25% TSR upside to our sum of the parts-based valuation (985p) but concede that resumption of performance may need rate expectations and inflation to peak.
Travis Perkins clocked a robust trading performance in Q3 FY22. The group’s lfl sales came in at +7.4% yoy, driven by the core Merchanting business (+8.7% yoy). While the decline in volume was attributable to tough comparable base, it will be increasingly difficult for management to pass on price increases to end-customers. The strong order book (claimed by large contractors) is also unlikely to be sustained. We will trim our financial estimates slightly but maintain our positive stance based on the stock’s valuation.
A FY22E guidance figure in line with consensus should be helpful, but the outlook for FY23E is all important, and we expect numbers to continue to edge lower here. With the shares already trading on c.9x PE, the key debate remains how much of this is already reflected in the price.
Toolstation performance leads to downgrades
Betwixt and between After weaker guidance for FY22E and reduced expectations for Toolstation, we are cutting estimates by 10% in FY22E and 14% in FY23E. We also reduce our TP to 1,160p, and downgrade our rating to Add. While the shares are inexpensive at c.8.5x CY23E earnings, we believe the investment case is somewhat lacking a catalyst currently, and see better opportunities across the rest of the distribution sector. Despite the downgrades, the inexpensive valuation, strong balance sheet and c.£450m of freehold property should provide an element of support. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com 12-page note
The H1 performance of Toolstation was disappointing, but Merchanting performed well, bearing fruit from work to reposition it and also from exposure to social housing refurbishment which is now growing again. We have made cuts to estimates of 7-9%, but consensus will move less and this compares with a 43% fall in the shares (ytd). The market has missed the shape of the comps in for Q2 2022 and we view Toolstation’s hiccup as a blip not a trend. We see over 50% upside to an unadventurous target price of 1440p (down from 1814p). The market seems to be over-estimating downside risk, dismissing Toolstation’s long term growth and ignoring improvement in the core.
Summary of H122 results: Travis Perkins H122 adjusted operating profit declined by -0.6%, a 9% miss versus consensus estimates due to higher than expected inflationary pressures including fixed-cost inflation and utility cost pressures in the Toolstation division not fully compensated by resilient trends in the core merchanting division. Key news: Whilst management is calling for improving trends in H222 as the comparison effect normalises in H2 vs. H1 and RMI activity remains firm, lower profitability and margins for Toolstation has led the group to increase its net loss expectation for the business to GBP30m from GBP20m previously. Although group guidance for FY22 is to deliver a performance in-line with market expectations, we see increased risk of consensus earnings downgrade with adjusted operating profit likely to reduce by around 10-15m towards GBP340m from GBP353m pre-results. We forecast GBP337m 2022 adjusted operating profit. Earnings: We trim our FY22 EPS by -7% and by -2% after integrating the miss and lower profitability for Toolstation not fully compensated by the stronger buyback programme in 2022. Rating and target price: We reiterate our Outperform rating but trim our target price to GBp1,300/share after integrating a higher cost of capital amid increased macroeconomic uncertainty. Our target price is derived using a 8.5% FCF yield ex-growth capex in 2023 (discounted back one year at 10%) vs. 7.5% previously. Investment case: A successful turnaround story with attractive FCF generation and a capital return focused mind-set.
Interims broadly in-line, but small downgrades expected Travis reported flat profitability in the first half of the year, as continued good demand in the Merchanting business was offset by a softening DIY backdrop in Toolstation. Higher than expected losses in Europe and a significant fall in profitability in the UK (lower volumes and higher costs) mean that expectations for the year are “broadly in-line”. We expect consensus PBT to move down by c.3% to around £300m. At 1,267p the shares trade on 8x CY23E EPS, with a 13% FCF yield. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com
Travis Perkins has announced a strong start to FY22. Q1FY22 sales surged by 13.6% yoy, led by strong demand in the merchanting business (+17.9% yoy). While we acknowledge the headwinds like economic uncertainty, inflation and manufacturing costs, Travis is relatively better placed due to the growing interest in energy efficiency projects and a healthy backlog in social and economic infrastructure work. We maintain our positive stance on the stock.
Today's news and views, plus announcements from HIK, RKT, TPK, AO., SHI, LINV, & AEXG.
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Building Materials - Trading Comment - TPK.L Travis Perkins^ (TPK.L, Sell at 1267p) Mixed bag in Q1; Toolstation 12% LfL revenue decline concerning
Strong start and pricing still a tailwind Travis Perkins has enjoyed a strong start to the year, with revenues ahead by c.14%, mainly driven by price inflation. The demand outlook remains healthy, particularly across the group’s larger customers, and the jobbing builder remains busy. The Ukraine conflict is likely to mean price inflation remains higher for longer, which should be a tailwind for margins, as the cost base remains manageable. The shares are inexpensive at 10x CY23E earnings, and with a positive backdrop, cash generation should remain excellent, giving the group optionality around shareholder returns. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com
Meeting Notes - Mar 17 2022
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Further progress expected; forecasts upgraded
Travis Perkins (TPK.L) - Sell at 1270p We applaud Travis Perkins management for streamlining the group and reducing both operating and financial leverage. However, we think TP may be a shrinking format longer term. We also see risk to FY22F consensus earnings. Our intrinsic value for Travis Perkins is c.1200p and we therefore retain our SELL recommendation.
Travis Perkins continues to clock a strong performance, despite the fear of multiple macro level headwinds. While the merchanting segment led the pack in FY21, Toolstation also crossed to double-digit lfl growth. The banner should continue to expand its branch network and gradually improve the financial performance (ROCE). We expect continued strength in the UK’s RMI activity during FY22. Positive stance is maintained for the stock’s valuation.
Summary of FY21 results Travis Perkins'' FY21 Adj. operating profit excluding property gains reached GBP304m, in line with consensus estimates. Q421 organic growth of 25.4% came slightly below our expectations of 26.2%, as a result of slower merchanting growth towards year-end. Key news Management provided reassuring comments during the conference call with anticipation for adjusted operating profit post property gains to improve further despite GBP25m lower real-estate gains. The group expects further volume growth in 2022 against a challenging base effect, driven by supportive renovation trends, robust trends in new-housing and a recovery across the commercial end-market. Merchanting margins should remain within the 8-8.5% range in 2022. Toolstation will face a tough comparison effect in H122 as DIY trends normalise, but management is seeing very strong traction from the B2B segment, with a growing share of the wallet from its existing and larger customers. Earnings We trim our FY22 by -1% and our FY23 EPS by -3% to reflect slightly reduced buyback expectations amidst broadly flat EBIT revisions. Our net-debt estimate is also higher to reflect the higher debt profile of the company in 2021 vs our prior expectations. Rating and target price We reiterate our Outperform rating and trim our target price to GBp2,000/share from Gbp2,050/share reflecting higher debt forecasts and slightly higher share count. Investment case A successful turnaround story with attractive FCF generation and a capital return focused mind-set.
Travis Perkins’ results would ordinarily have been better received. Results beat our EPS estimate by 5% and we upgrade 2022E by 6%. We agree with Travis’ positive view on UK residential RMI given the strength of customers’ workloads and as raised appetite for home improvement will take some time yet to be satisfied. Toolstation continues to grow quickly, with a two year like-for-like of 26% in H2 and improving margins mean we increase our valuation to £1.3bn (close to 30% of the group). We see 45% upside to a conservative SOTP based target price of 2020p.
Upgrading to Buy after strong trading After a strong set of results we increase our FY22E PBT estimates by 4% and upgrade our recommendation to Buy. Travis Perkins remains well placed to benefit from continued strong demand in the RMI market, while demand is now also coming back in the Commercial and Social housing space. Given its strong balance sheet and track record of excellent cash generation we see scope for additional capital returns over the medium term, perhaps as much as £500m. The shares currently trade on just 12x CY22E PE, in our view undemanding given the supportive macro backdrop and leading positions in the market. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com 13-page note
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Small underlying beat in FY21 Travis Perkins delivered operating profits of £353m in FY21E, 19% ahead of a restated FY19. While this is 4/6% ahead of our/consensus estimates, much of the beat is coming from additional property profits, leaving the underlying performance broadly in line. The outlook statement is somewhat limited, but the group remains confident of making further progress this year. This is underpinned by the fact that share buybacks have been increased by another £70m, to £240m. Trading at just 12.4x CY22E earnings and with a 6% FCF yield, the valuation remains undemanding in our view. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com
Travis Perkins has reported EPS 5% better than we expected, although £9m of the £12m beat at PBT level came from higher than expected property profits. The main feature of results for us is that Toolstation’s UK margin was over 6%, against our 5% estimate, suggesting that profitability is improving faster than expected as the network matures. This further supports our case for an improved stock market valuation of Toolstation. We see around 40% upside on a sum of the parts basis, arguing that Toolstation is worth £1.1bn. The market also misses the point that Travis has used the pandemic to address some long standing challenges.
Travis Perkins stated in its trading update (28 October) that FY21F property profits would be £40m, which is £20m higher than we had expected. As a result, we increase our FY21F EBIT from £320m to £340m, which raises our FY21F EPS by 7% to 106p. We expect property profits to normalise next year at c.£20m and so our FY22F and FY23F forecasts are unchanged. We expect Travis Perkins to hit peak margins in FY21F and forecast competition to intensify in its core general merchanting business. We stick to our SELL recommendation and note that a P/BV of 1.7x (FY21F) is 20% above the 10-year average
Summary of Q321 results Travis Perkins Q321 l-f-l sales increased by +13% YoY, missing our forecasts of +17%, albeit it was still a very solid quarter considering normalising DIY trends, tougher comparatives, supply-chain disruption, logistic bottlenecks, labour scarcity issues, and other external factors such as the ''pingdemic'', the summer holiday cool-off effect and the fuel crisis. Key news Despite a slightly weaker than anticipated Q321 sales performance, management increased its FY21 trading profit guidance by +7% to GBP300m (Excluding GBP40m of property profits). This is mainly driven by the benefit inflation has on stock revaluation and therefore distributor margins. Looking forward, the group expects some near-term normalisation, including in Toolstation as the group faces tougher comparatives near-term. Having said that, group margins are likely to surprise positively as inflation is expected to increase further into the start of 2022. Earnings We increase our FY21/22 EPS by +5% after integrating a more positive margin scenario near-term and into 2022. Rating and target price We reiterate our Outperform recommendation and increase our target price to GBp2,050/share, leaving more than 30% upside vs. current share price. Investment case A successful turnaround story with attractive FCF generation and a capital return focused mind-set.
Meeting Notes - Nov 01 2021
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Modest upgrades to full year forecasts
Volume expectations still undemanding We have increased our FY21E EPS estimates by 11% following the 3Q update, which underlines the scale of the price inflation (c.11%) currently working its way through the building sector. Limited volume growth in the Merchanting division in 3Q has called the longer-term growth of the business into question, but we believe our volume forecasts (2.5% FY19-23E CAGR) are conservative given the supportive backdrop. Our FY22/23E estimates are unchanged, save for a higher debt figure on higher working capital investment, which pushes our TP down c.2% from 1,900p to 1,850p. We retain our Add recommendation. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com 7-page note
Travis Perkins continued to register strong sales growth in Q3 FY2021 supported by healthy demand from the RMI end-market and store network expansion. On the back of a sustained positive trading performance, management upgraded its adjusted operating profit guidance for FY2021. However, the stock came under pressure as the market focused on high inflationary pressures amidst continuing building material and labour shortages. We will revise up our estimates and target price to incorporate the Q3 update and upgraded guidance. Positive stock recommendation maintained.
Price inflation driving upgrades After a strong 3Q performance (LFL sales +13.1%), Travis is raising FY21E operating profit expectations by c.10%. Price inflation of c.11% is the driving force behind the upgrades, with rising material and commodity prices being passed onto customers, while the property profit expectations have also been increased by £10m. The shares have struggled in recent weeks, falling 6%, and today’s upgrade should reverse that trend. At 1,585p, the share trade on 13.4x CY22E, which we think offers good value given the positive trading backdrop. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com
Travis Perkins held its Investor Update last week, detailing the long-term drivers for the UK construction material industry and the group’s strategic plan. The company plans to offer a more digitally- and service-oriented offering to capture market share and address the long-term trends. Toolstation also offers healthy growth potential in both the UK and European markets. However, the margin improvement will remain modest, particularly as Toolstation tries to chase the market leader in the UK and expand scale elsewhere.
Higher property profit leads to a modest upgrade
Travis Perkins’ H1 results confirmed that the recovery is on track, with adjusted operating profit 14% ahead of the level delivered in 2019. Merchanting’s revenues advanced by 2% compared to 2019 despite closing 9% of its branches in 2020 and profit grew by 11% as it benefitted from branch and other cost savings. Toolstation continues its impressive growth. We see over 15% upside to our increased sum of the parts based target price of 1969p (from 1900p), and expect the forthcoming capital markets day to make Toolstation’s growth more clear to the market and to address the modernisation of Merchanting. We expect RMI activity to remain buoyant.
Inexpensive exposure to RMI market After a strong set of interims and raised guidance, we are increasing our EPS estimates by 4% in FY21E and 6% in FY22E. With the group confident around the sustainability of RMI demand, and the portfolio reorganisation now complete, the focus will turn to longer-term capital allocation priorities. With strong FCF generation we see no reason why Travis could not return £1.1bn to shareholders over the next three years, £600m ahead of the amount currently forecast. We increase our TP to 1,900p (1,820p) and retain our Add rating. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com 12-page note
Travis Perkins reported its H1 FY2021 results which were broadly in line with market expectations. Robust activity levels in RMI markets supported the top-line momentum, with the group also lapping soft comparables in Q2. Revenue recovery and restructuring initiatives aided the profitability improvement. Management has reinstated the interim dividend, while slightly raising the adjusted operating profit guidance for the year. We will adjust our financial estimates but expect to maintain the cautious stance on the stock valuation.
Summary of H121 results Travis Perkins'' H121 Adj. operating profit (before property profits) reached GBP147m, missing consensus expectations by -2%. The miss was driven by a lower-than-expected contribution from Toolstation and higher central costs, partially offset by stronger Merchanting margins. However, the latter benefited from GBP8-10m of provision reversals, suggesting the miss would have been closer to 8% in H121 vs. consensus underlying profit expectations. Key news Management upgraded its FY21 operating profit guidance to GBP310m from GBP300m on the back of higher-than-expected property profits. Excluding these, the guidance remains unchanged and implies consensus could revise its trading profit ex. property towards GBP280-285m from GBP296m pre-publication. On the positive front, volumes are well positioned to grow further medium-term amidst a robust construction outlook driven by buoyant RMI trends. The group reinstated its dividend policy with a 30-40% pay-out ratio with the potential to increase this further with the CMD likely to focus on sustainably higher capital returns. Earnings We trim our FY21 EBITA ex-property profits by -5% on the back of lower than previously anticipated margins in the Merchanting division. However, we turn more positive on FY22 margins and now expect a slight expansion vs. our initial forecast of margins coming under pressure. Rating and target price We reiterate our Outperform rating and increase our TP by +2% to GBp1,950/share. Investment case A successful turnaround story with attractive FCF generation and a capital return focused mindset.
Upgrades after strong interims As expected, Travis has delivered a strong set of interims, benefiting from the continued recovery of the RMI sector. Adjusted operating profits for FY21E are expected to increase by c.3%, as higher property profits flow through the P&L. Longer term, the group remains confident around the sustainability of the demand trends in the RMI space, while they are also beginning to see demand return in commercial markets. At 15.5x CY22E earnings the shares are not as cheap as they once were, but with news flow expected to remain positive in the coming months, we think the shares have further to run. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com
Updated guidance leads to upgrades
Travis Perkins is riding the crest of a wave. Following its unscheduled trading update on Tuesday (21 June) we raise our FY21F underlying operating profit from £255m to £320m but remain sceptical on the group’s longer-term fundamentals and retain our SELL stance with a price target of 1500p.
Travis Perkins yesterday announced that management expects 2021 operating profit to be materially ahead of consensus expectations. We have raised our 2021E EPS forecast by 18% to reflect improving trading. Merchanting is ahead of our expectations, with revenues in April and May 6% ahead of 2019, despite 8% fewer branches. Trading improved from -3% in Q1 as prices are rising, and passed on, and volumes benefitted from improving home refurbishment spending. We have raised our target price to 1900p on rising estimates and maintain Buy.
Upgrades after strong trading update Yesterday’s unscheduled trading update indicated that the positive trends seen in the first quarter have continued through April and May, and operating profits for the year will be materially ahead of expectations. As a result, we have increased our FY21E operating profit estimate by 35%, to £305m, driven by the better performance currently being seen in the Merchanting business. While Travis remains well placed to continue to benefit from the upturn in RMI activity, we make no changes to FY22 and FY23 estimates, and we maintain our current target price (1,820p) and Add rating. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com 6-page note
Travis Perkins announced an ad-hoc trading update for Q2 FY2021, registering the strong sales growth in the months of April and May as a result of healthy activity levels in the domestic and commercial RMI markets. Management now expects FY2021 adjusted operating profit to be materially ahead of current market expectations. The share price jumped c.7% on the back of the trading update. We will raise our financial estimates and target prices, but most likely retain our cautious stance on the stock.
Forecasts updated following corporate action
Updating model post P&H disposal and reducing to Add We are updating our model for the disposal of the P&H business, and downgrading from Buy to Add following a period of strong performance. However, we remain positive on the company and its end markets, and are mindful of the potential for upgrades should demand accelerate again and margins tick up on the back of rising materials inflation. At current prices, the shares trade at c.15x CY22E earnings. Our TP rises slightly from 1,750p to 1,820p. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com 6-page note
Travis Perkins announced the disposal of its Plumbing & Heating distribution business for £325m. The divestment is in line with management’s strategy of focusing on trade customers and streamlining operations. While the sale price was ahead our NAV estimate, the cautious stock recommendation is being maintained citing sustainability concerns with respect to elevated activity in the UK residential market and the expected unwinding of government support schemes in the second half of the year.
Travis Perkins has announced that it is selling the last of its Plumbing & Heating division to private equity for £325m, £45m higher than our valuation. The difference is worth around 18p per share, after disposal costs. We see upside as Toolstation is now a meaningful part of the group, and its growth should be driver of value creation. The core of Travis is improving and the group has excellent exposure to UK RMI, where activity will continue to benefit from rising housing transactions.
P&H business sold for £325m Last night Travis Perkins announced the sale of the P&H business for £325m, a c. 7x EV/EBIT multiple and c. 20% premium to a similar disposal by Ferguson. The proceeds will be returned to shareholders via the combination of a 35p special dividend and share buyback. The disposal leaves the group free to focus on the core task of returning the general and specialist Merchanting businesses to sustained growth, and accelerating the roll out of Toolstation across the UK and Europe. A task that should be easier given the supportive market backdrop. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com
Media Weekly, Travis Perkins, Dixons Carphone, HSS, Futura Medical, SMID Market Highlights
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Updating numbers and reiterating Buy post WIX demerger We update our numbers following the demerger of Wickes. Headline revenues and PBT fall by 17% and 21% in FY21E and by 16% and 20% in FY22E. The share consolidation reduces the scale of EPS declines to 11% and 10%. With over half of the group’s revenues coming from the RMI sector, Travis remains well placed to benefit from the strong market conditions, while the housing and commercial-focused businesses should see improved trading performance as we move through the year. At c. 12x FY22E earnings the shares are inexpensive and we retain our Buy recommendation with a 1,750p target price. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com 6-page note
A new beginning Travis Perkins successfully demerged its Wickes DIY business on the 28th April 2021. We believe this turns over a new page for management, enabling the divestment of the plumbing and heating division to focus energy on the core business via organic growth and bolt-ons. Strengthening its building merchant leadership We expect management to capitalise on the group, refocusing on its core DNA with plenty of medium-term opportunities to grow both organically (Toolstation) and through MandA. We believe the group could also look at new attractive verticals including HVAC and lightside specialities and further invest in digitalisation, the product offering and branches in an effort to grow market share. Shareholder returns could be back We anticipate the group will restart its dividend policy in the summer and we would expect more to come on the shareholder return front post the divestment of the plumbing and heating division and the incremental value generated as a merchant business. A favourable UK renovation outlook The UK renovation outlook has never looked this bright; homeowner equity is at record highs, equity withdrawal rates are healthy, interest rates are low and existing home transactions are booming. This should drive pent-up renovation demand until the decarbonisation renovation wave picks up the pace to drive 30 years of structural growth. We are optimistic on the UK distribution sector and our FY21/22 EBIT estimates stand +16%/21% above consensus. Rating and investment case We have updated our valuation methodology to reflect the divestment of Wickes and the higher implied multiple of building merchants vs DIY. We therefore apply a 6% FCF yield ex-growth CAPEX vs. 6.5% previously. This implies a 12x FY22 EV/EBIT multiple at our target price which we view as sensible and still well below peers such as Grafton or Howdens Joinery.
We publish revised estimates and target price following the Wickes demerger, which went live yesterday. We continue to see good upside in Travis’ shares even as they held up strongly through the demerger. We have reflected some of the positive read-across from Grafton in our estimates, upgrading core forecasts by 4% this year and 2% next. We see upside on a sum of the parts basis as Toolstation should be better reflected in the group valuation. Travis’ core merchanting activities are improving. We do not see the recovery in home improvement activity as a blip; it is underpinned by rising housing transactions.
Wickes’ has transformed into a digitally-led, integrated product and services business, consistently outperforming its markets. It is uniquely positioned and well-balanced, and management now has the freedom to invest behind its multiple growth levers. On prudent assumptions, we still forecast a robust 7.5% FY20-23E PBT CAGR, with upside risk driven by RMI momentum and self-help. Alongside a growing material net cash position and solid dividend, the market should begin to appreciate Wickes’ high quality.
Following the demerger of Wickes, we have updated our financial models. We have also increased our revenue and EBIT forecasts for Toolstation given its strong performance in FY21 Q1. Ex-Wickes, the group has a higher working capital requirement, higher financial leverage but lower reliance on IFRS 16 leases and therefore lower operating leverage. Our base case SOPs valuation for Travis Perkins (ex-Wickes and post share consolidation) is 1320p, which is 14% lower than the current share price. SELL.
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Retail Sector Upgrade Cycle, Wickes, Travis Perkins, Real Estate Investors, Commodity snapSHOT, Shanta Gold, SMID Market Highlights
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We raise our target price from 1650p to 1900p as we dig deeper into the sum of the parts. We expect Wickes to trade at a significant premium to the group. Toolstation is no longer small enough to ignore and should be highly valued for peer-leading growth. Core merchanting is improving and the specialists have leading positions. We do not see the recovery in home improvement activity as a blip; it is underpinned by rising housing transactions.
Wickes’ has transformed into a digitally-led, integrated product and services business, consistently outperforming its markets. It is uniquely positioned and well-balanced, and management now has the freedom to invest behind its multiple growth levers. On prudent assumptions, we still forecast a robust 7.5% FY20-23E PBT CAGR, with upside risk driven by RMI momentum and self-help. Alongide a growing material net cash position and solid dividend, the market should begin to appreciate Wickes’ high quality.
Travis Perkins continued its strong performance from H2 FY2020 into Q1 FY2021, delivering 17.4% lfl sales growth ahead of market expectations. No wonder, the stock was up c.2% at time of writing. We expect the group to maintain its growth momentum as the UK emerges out of the lockdown measures with the vaccine roll-out to underpin economic and construction activity. Furthermore, the soft comparable in the near term should help.
Today's news & views, plus announcements from ENT, TPK, AO, CAY, CAPD, POLR, WIEN, BRK, THG, ROO
Strong Q1 trading, outlook still positive RMI demand in the UK is recovering, and Travis Perkins is a key beneficiary of this trend. LFL sales (ex Wickes) increased by >17% in Q1, boosted by pent-up demand and increased housing transactions – trends we expect to continue for the foreseeable future. Wickes is seeing similar trends, with LFL sales up 20% in the period, while the demerger is expected to take place on 28 April. We remain bullish on the outlook for the sector and believe Travis offers good value with the shares trading at 12x CY22E earnings. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com
Further volume recovery in Q121. Trading update 15th April 2021 Travis Perkins will publish its Q121 trading update on the 15th April 2021. We forecast c. +8.6% lfl revenue growth (excluding Wickes), driven by strong renovation trends and continued recovery across most end-markets. 2021 offers a lot of room to surprise positively Supportive housing policies and low interest rates have propelled housing transactions, which have increased by +33% YoY in the last 3 months. We believe the outlook for distributors and Travis Perkins is brightening and view the company guidance and consensus expectations as too cautious, offering plenty of room to surprise positively. Our more optimistic earnings expectations stand +13% above consensus We increase our top-line and earnings expectations by +4% and +10% respectively as we turn more positive on the UK renovation market outlook. Our FY21 EBIT expectation now stands +13% above consensus. We have not yet reflected deconsolidated Wickes as part of the planned demerger in our earnings estimates. Strategic update in Q3 is the key catalyst As the deconsolidation of Wickes is set to be effective at the end of April, we turn the page and view the group upcoming investor day in Q321 as the key catalyst. We expect the focus will be on capital allocation, including shareholder return policies and long-term CAPEX/MandA strategies. Rating and target price Our higher earnings expectations drive our target price to GBp1,810/share (from GBp1,650), suggesting 10% upside. We anticipate FY21 consensus earnings to increase as the reporting season highlights stronger UK macro trends. We reiterate our Outperform rating.
Bulls of Travis Perkins point to the Sum of the Parts (SOPs) valuation case. However, we think fair value is only c.1275p on this basis, which is 23% below the current share price. This is supported by the 5-year average P/BV multiple. Following its FY20A results (2 March) we have downgraded FY21F EPS by 11% and upgraded FY22F EPS by 3%. We now expect a more gradual margin recovery in Merchanting and Retail, and FY21F EBIT losses of £16m at Toolstation Europe, as indicated by management. We also add FY23F to our models which we note still include Wickes (due to be demerged 28 April).
Travis Perkins has resumed the demerger of the Wickes banner after the process was suspended last year following the onset of the pandemic. Wickes is expected to be listed as a standalone company on the LSE on 28 April 2021 with existing Travis Perkins shareholders to be issued new Wickes shares in the ratio of 1:1.
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Wickes demerger circular Having restarted the formal Wickes demerger process on 2 March, Travis Perkins has indicated the circular for Wickes’ listing on the Main LSE will be published today. The process should help unlock some value for TPK shareholders and offer investors an attractive and purer way of playing the recovery in the UK renovation market. A Wickes CMD on Friday will be helpful in guiding valuation thoughts. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com
Summary of FY20 results Travis Perkins'' FY20 EBITA (exc. property profits) stood at GBP216m, 1% ahead of consensus expectations. The magnitude of the beat was slightly disappointing given booming DIY trends in H220. December lockdown measures interfered with the pace of earnings recovery in our view. Key news Following the pause of Wickes demerger process in 2020, the process is restarting, with the closing expected as early as the end of April, a major near-term value creation catalyst. The disposal of the PandH division is once again put on hold near term with the priority being on further improving the division margin profile following an impressive achievement in H220. We think this is the best decision to achieve value-accretive exit multiples. In terms of shareholder returns, the group will reinstate a dividend in 2021 but comments during the call suggested the payout ratio will remain below pre-covid levels in 2021 as Travis Perkins will fund the EUR130m capitalisation of Wickes as part of the demerger process. The group did not provide much granularity on the 2021 outlook but management confirmed the early start of the year has seen similar trends as Q420. Earnings We cut our FY21 EBITA expectations (exc. property profits) by -9%, reflecting a more conservative view on retail margins and lower margins on the high growth Toolstation division. Rating and target price We maintain our Outperform rating but cut our target price to GBp1,650 (from GBp1,700) to reflect our lower earnings estimate, slightly offset by lower CAPEX estimates. We have also trimmed our TP yield to 6.5% vs. 6% previously given the pause on the PandH disposal and the more prudent shareholder return approach near-term. Investment case A turnaround story with a portfolio recycling strategy likely to drive a re-rating.
Robust end to the year leads to upgrades
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Inexpensive exposure to RMI market Travis continues to offer inexpensive exposure to the UK’s recovering RMI market. We expect RMI demand to continue to improve through the year, with pent-up demand likely to come through as restrictions are removed and the logistical complexities of having tradespeople in the house ease. The longer-term equity story will depend on the success of the group’s plans to reinvigorate the core Green and Gold business, but with the shares trading on just c.11x CY22E earnings, we are happy to retain our Buy rating. However, we reduce our TP to 1,740p after making minor reductions to our estimates. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com 15-page note
Travis Perkins’ FY results were better than we expected, although only narrowly ahead of consensus. The highlights were the strong cash flow performance and the 34% increase in H2 profits achieved by Wickes. We have upgraded our estimates by 10% for 2021 and 2% for 2022 as strong trading in Q4 carries into Q1 2021. The Wickes demerger should create value as the market should rate it highly for its fully integrated online proposition. We see 17% TSR upside to our unchanged and conservatively set sum of the parts target of 1650p.
FY20 in-line, RMI market continues to grow Travis delivered FY20 results in-line with expectations, with a recovery in demand in the second half of the year somewhat offsetting the severe declines in H1. The RMI market has been the standout performer, with Wickes (+20%) and Toolstation (+30%) delivering strong growth in the second half of the year. Comments on the outlook are limited, but these trends have continued in the first two months of the year, and we expect the strength of RMI demand to continue through FY21. The shares have slightly lagged the wider sector in recent weeks, but remain inexpensive, in our view, trading on c. 11x FY22E earnings. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com
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We have revisited our estimates to reflect recent news that Wickes and Toolstation would be returning furlough and rates holiday receipts. This leads us to lower our 2020E EPS estimate by around 19%. We also take this opportunity to nudge up our 2021E estimate by 3% as momentum in Wickes and Toolstation has ended the year strongly and as Merchanting is holding on to around 40% of lost sales from closed branches. The shares look attractive on stand-alone valuation, as a play on the continuing strength of home improvement and as its own initiatives should create value.
Strong Autumn trading, repayment of furlough monies This morning’s unscheduled trading update indicated that trading continues to recover, led by exceptionally strong growth in the DIY segment. The better trading and excellent balance sheet position has given the group the confidence to do ‘the right thing’ and return both the business rates relief and furlough monies associated with Wickes and Toolstation, which totals c.£50m. While this will reduce FY20’s EBITA by a corresponding amount, we believe it demonstrates the group’s confidence in both the outlook and balance sheet. The shares trade on c.15x CY21 consensus earnings, falling to c.13x CY22. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com
Travis Perkins’ rebound in Q3 FY20 was slow, as the strong momentum in domestic RMI (repair, maintenance and improvement) was held back by softness in the larger new construction activity. Unfortunately, over the coming few months, the sustainability of the recovery will now again be tested by the resurgence in COVID-19 cases in the UK and uncertainties around the Brexit outcome. Hence, the sentiment around the stock is likely to remain muted, in our opinion.
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Summary of Q320 Travis Perkins organic sales grew by +3.8% in Q320 vs. +1% consensus expectations on the back of a strong recovery, driven by buoyant DIY trends and robust RMI activity offsetting continuing pressure in new-housing and non-residential markets. Key news The group highlighted a strong pick-up of activity in September with l-f-l sales growing by +8% and higher workloads in the new-housing sector implying Q420 trends should remain in positive territory unless restrictive lockdown measures are introduced. Management now expects FY20 EBITA in the upper-half of consensus expectations (GBP222-261m), implying mid-single digit consensus upgrades. In terms of capital allocation, management mentioned that it will await the upcoming winter period and the trading conditions during this period to update the market on both its dividend policy and portfolio recycling strategy. Earnings We have integrated the faster than expected volume recovery and increased our EBITA expectations by +4% in 2020 and +2% in 2021. Rating and target price Our earnings upgrade is the main driver of our increase in target price to GBp1,445 from GBp1,415. We reiterate our Outperform rating. Investment case We believe the market is discounting near-term distress and forgetting the group''s competitive advantages coming out the other side.
Travis Perkins published its 2020 Q3 trading statement this morning for the 3-month period to end-September. Retail (Wickes/Toolstation) had an excellent quarter with LfLs driven by the strong recovery in UK residential RMI (repair/ maintenance/ improvement) demand. The Merchanting business (c50% of group revenues) fared less well with a LfL decline of 3.1%. We adjust our FY2020 forecasts to reflect management guidance of EBITA of c£250m and retain our SELL recommendation.
Like-for-like sales growth turned positive in Q3 (+3.9%) after a very strong September (+8%) more than offset July and August which were slightly down on the prior year. Toolstation and Wickes have been running ahead of last year since Q2, while merchanting is recovering more slowly. We are slightly disappointed the Wickes demerger has not been re-started. Management has said it expects results for FY20 to be in the top half of consensus. We like the shares for the optionality on disposals, the improving core and still attractive valuation - 11x 2019 PER.
Better momentum in UK construction markets should drive consensus earnings upgrades The consistently cautious tone during the H120 results season of most UK construction companies on H220 trends could prove to be too pessimistic given construction markets have gained momentum, opening the door to a likely positive Q320 trading update season. Travis Perkins kicks off the season on the 22nd October. Building renovation is the Q3 season treat The RMI/DIY markets have been robust throughout the summer as indicated by the UK retail sales and read-across from the construction industry. The stamp-duty holiday, resilient housing transactions and house prices should help to support the medium-term outlook for the renovation sector. New housing activity could be the real surprise The UK''s leading housebuilders are much more optimistic on the shape of the recovery and the outlook for the housing sector than our UK brick coverage. Barratt''s strong housing completion outlook in 2021 implies consensus upgrades for Ibstock and Forterra are on the horizon. TPK: Near-term value creation from portfolio recycling? Stronger Q320 activity and improved near-term visibility could lead management to provide an update on its planned demerger of Wickes and the divestment of the PandH division, in turn leading investors to look again at the potential value creation from this strategy. UK bricks: A brighter outlook - Upgrade Forterra to Outperform Housing construction is showing signs of life again, with recent trends and industry feedback suggesting the recovery is more pronounced than expectations. Ibstock and Forterra are likely to surprise positively. Our increased volume expectations in Q320/H220 and in 2021 is the major driver of our earnings upgrades. We upgrade Forterra to Outperform on the back of a stronger UK residential outlook both near- and medium-term.
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Travis’ shares are weak since H1 results, as H1 PBT dis-appointed, H2 started unspectacularly and guidance is still absent. However, the market missed the silver linings. Cash flow was very strong in H1, with covenant net debt closing at only £22m. Trading is improving steadily, with DIY leading and trade following. Management has taken the opportunity to accelerate planned improvements, mainly restructuring the branch network. We like the shares as we see the Wickes demerger and Plumbing sale as catalysts, RMI appetite improving and valuation compelling.
Travis Perkins posted subdued H1 FY20 results as, amidst the Coronavirus-caused disruptions (mainly in Q2 FY20), all its banners except Toolstation slipped into negative territory. Worse, the impact on the adjusted operating profit was 4x vs the 20% fall in the top-line. While H2 FY20 is likely to generate much better top-line and profitability, management remains cautious about the demand for building materials in the near term, amidst the uncertain macro-environment conditions and expectations of higher unemployment in the country.
The Chancellor’s summer statement is a welcome boost to companies in our coverage universe. The Stamp Duty holiday will not only help housebuilders, but merchants too, whose volumes are highly correlated with transactions. The well trailed housing improvement grant scheme will help insulation suppliers and window makers. We are also encouraged by the repeated infrastructure commitment as well as the public sector decarbonisation programme.
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Travis Perkins’ revenues are recovering faster than we initially expected. The group has also announced that cash generation in recent months has been very strong, with cash balances rising £241m over the last seven weeks. Management also announced cost savings which will reconfigure the group for the expected short-medium term outlook.
While Travis Perkins sustained positive momentum in the majority of Q1 FY20, Coronavirus infected its final two weeks’ performance. In Q2 FY20, business activity will deteriorate judging by the c.66% revenue decline in the first three weeks of April. As the Brexit-related uncertainty and economic recession are likely to prevail in rest of the year, the cost-cutting and cash-preserving actions act as saviours.
A good year ends for Travis Perkins – the healthy FY19 top-line performance, combined with cost savings led to a profitability improvement during the period. However, management has maintained the cautious outlook for FY20, as the macro-economic uncertainties in the UK are far from over yet. Nevertheless, the Wickes demerger plan remains on track for Q2 FY20.
Travis Perkins FY results came in ahead of our expectations, with all four divisions showing progress. The main highlight was that the merchanting businesses grew its market share, showing clear outperformance against Grafton in 2019.
The UK has faced substantial headwinds in 2020 so far; with the easing of the Boris bounce, the outbreak of the coronavirus and concerns over Brexit negotiations regaining focus, large and mid cap stocks have starkly de-rated over the last few weeks (Fig 1). Substantial capital flows into the UK however have helped to carry the FTSE Small Cap higher in 2020 (Fig 3), helping the Small Cap discount fall from levels last seen post the 2008/09 financial crisis (Fig 4).
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Our Hot Off The Wires daily newsletter takes a look at the morning's market movements, news stories and company announcements. Don't forget to have a go at our daily trivia! Companies mentioned in this edition include: Vodafone, Brewin Dolphin, Energean Oil & Gas, FDM Group, Fresnillo, Henderson Smaller Companies Trust, Quilter, Sanne Group, *Travis Perkins/Wickes, Wizz Air and Pendragon. If you would like to be subscribed, please email us at info@capitalaccessgroup.co.uk. *Capital Access represents Travis Perkins/Wickes - if you would like more information or access to the Management team of this company, please get in touch.
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Travis Perkins maintained the strong momentum in Q3 FY19 – all continuing businesses, especially Toolstation and Retail, contributed to the top-line. Although, management sounded cautious about the near-term outlook, it expects the full-year performance to remain in line with expectations. Progress with the Wickes demerger is on-track, but the disposal of the P&H business has been paused amidst the uncertain macro-economic environment.
We have obtained clarity regarding Travis Perkins’ plan to demerge Wickes, the key takeaway being that the business will be spun-off as a publically-traded company by June 2020. While it remains to be seen if the separately-listed retail business would revive / perform better over time, the enhanced focus on trade-customers is likely to benefit Travis Perkins’ shareholders in the mid-term.
A strong Q2 19 performance by Travis Perkins was led by the improved business performance of Retail business and continued robust momentum at Toolstation. However, amidst the mixed key leading indicators of the UK builder’s merchanting and home improvement market, management maintained a cautious outlook for short-term demand. The demerger of Wickes was also announced. No material changes in our financial estimates.
We have taken this opportunity to revise our estimates as we move onto the IFRS 16 basis. We have done this ahead of H1 results as the company has provided the market with sufficient divisional information to rework the model fully.
Despite a solid start to the year (7.3% lfl sales growth), Travis Perkins has left investors guessing by not upgrading its full-year guidance of stable operating profit. Management has opted to wait for at least one more quarter, considering the macro-economic uncertainties in the UK. While we have improved the FY19 top-line growth estimate (following a strong Q1 performance), this momentum is not sustainable for the rest of the year. Our stock recommendation is likely to be maintained.
Travis Perkins has reported a strong start to the year with like-for-like sales growth of +7.3%, helped by an easy comparison against a wet and cold start to 2018. Merchants achieved growth of 11%, with core merchanting seeing some early benefit of improved service levels.
Travis Perkins ended the FY18 on a strong note. While all businesses clocked strong lfl sales growth, the key highlight was the return of Wickes (DIY banner) into positive territory. Management has guided for a stable FY19 operating profit, despite the expected higher inflationary cost pressures. We will revise our estimates upwards.
Travis Perkins’ FY results came in ahead of expectations, with PBT up 1%, 7% better than expected. The beat was driven by better than expected interest as well as an improved contribution from Consumer after a strong fourth quarter.
Travis Perkins conducted its Capital Markets Day last week. Although management remains confident about the company’s long-term growth fundamentals (led by the continued housing shortage in the UK and underinvestment in maintenance of ageing house stock), it sees some challenges in the short term. Put in context, the business has become quite complicated over the past few years, as the group’s expenses (driven by investments to grow the business) increased ahead of revenue in some areas. While some businesses (e.g. Contracts and Toolstation) have consistently performed well during the period, the company has been struggling in domains like Wickes, General Merchanting, etc. Even though some of this slump has been attributable to external factors (e.g. the slump in RMI activity post the Brexit referendum, formation of buying groups have made independent players more competitive vs national entities like Travis Perkins), the internal challenges have also contributed to the increased complexity / slower decision making / margin pressure / inadequate return of capital employed, etc. THe following are the key remedial measures announced in this regard: 1. Focus on trade customers 2. Divest the Plumbing & Heating division 3. Improve the performance of Wickes’ business before reviewing other options in the medium term 4. Generate annual cost savings of £20-30m by simplifying the group business and reducing branch and distribution cost bases. Moreover, management expects the group’s FCF to strengthen over the medium term, driven by improved earnings and lower capital expenditure.
Travis Perkins' strategic update at today’s Capital Markets Day says that it will sell the Plumbing & Heating division and seek to revitalise profit growth in General Merchanting by streamlining management layers to save £20- 30m per annum, while also empowering branch managers to enable better market share momentum. The cost savings should enable profit progress even in a dull market, while the successful sale of Plumbing & Heating (perhaps for £400-500m) should mean that capital can be recycled into more profitable businesses. The shares look cheap on a FCF yield of over 10%, especially as management is aiming to drive free cash flow by improving returns and now that capex has likely peaked.
The company posted good Q3 numbers, especially in the three merchanting businesses. However, the strong lfl momentum is likely to soften in FY19, especially in Contracts and P&H segments. All eyes are now set on 4 December 2018, the Capital Markets Day of Travis Perkins. A convincing performance turnaround plan would be the next key growth trigger in our opinion. Hence, we maintain the stock recommendation, despite the stock’s valuation being very attractive at current levels.
Travis Perkins has reported Q3 like-for-like sales growth of 4%, in line with expectations and the growth achieved in H1. As in H1, the three merchanting divisions achieved good growth (+7% l-f-l) with Group progress held back by Consumer (-4%). Management is confident that revenues and progress on cost reduction should ensure that consensus expectations for the full year are met, and also notes a degree of moderation in pricing pressure in Wickes. The shares are extremely unloved here and look very cheap, on 5.5X ev/ebitda 2019E. The shares are likely to perform better in advance of the CMD on 4 December.
Travis Perkins’ shares are oversold, never more unloved and highly undervalued. The night is likely to prove darkest before dawn as cost savings improve H2 results in General Merchanting and Consumer; Plumbing & Heating recovery continues; and, Contracts’ growth resumes. The shares offer compelling value here, especially the 10% FCF yield. We maintain our Buy rating and see over 30% TSR upside to our unchanged target price of 1525p.
Travis Perkins has reported poor H1 FY18 results. Although the top-line grew strongly (+4.2% lfl growth; 5.9% in Q2 FY18), the group’s profitability came in below our as well as the street’s estimates. Group adjusted operating profit excluding property profits slumped c.12% in the period. The downfall was largely attributable to the sales mix, weaker K&B showroom sales in Wickes and higher operating costs in the General Merchanting business. The company has charged £246m goodwill impairment for the business. Management expects challenging market conditions to persist and anticipates FY18 EBITA to come in at the lower range of analysts’ expectations (£360–390m). Also, it has commenced a comprehensive review of the Wickes business and will share details at the CMD in early December.
Travis Perkins has reported H1 PBT down 5% to £167m (Lib E £169m), with revenue up 4% (4% l-f-l, Lib E 3%), and operating margin down from 5.9% to 5.3% as overheads rose in support of business development and gross margin slipped due to mix in Plumbing & Heating and less kitchens at Wickes. Although results looked close to estimates, property profits of £17m were around £10m up on last year. Profits were broadly as expected in the trade divisions, but Wickes had another weak half with EBIT down 36% to £29m, with weakness in kitchens and bathrooms again. Management is guiding down estimates to the lower end of the range of expectations, which should mean consensus PBT falling around 4%. The shares look very good value on a FCF yield of around 9%, but the surprising weakness in Wickes is likely to depress the shares until profitability stabilises.
Travis Perkins’ Q1 sales growth was a little better than expected at +3.0% compared to our estimate of +1.8%. The General Merchanting and Contracts divisions were broadly flat as expected, impacted by weather, while Consumer was considerably worse than expected and Plumbing & Heating much better. Management is confident of achieving expectations in 2018 and has signalled a determination to adjust costs further if necessary to achieve this. We see a compelling case for the contrarian here with over 20% TSR upside, driven by cheap valuation on 11x PER and 9% FCF yield.
Travis Perkins’ shares are at five year lows and analyst sentiment is very depressed. We think the shares’ valuation is now highly attractive and can see a compelling investment case for the contrarian. Disappointments in the results should unwind fast and highlights were overlooked. The outlook is stable not catastrophic and might actually brighten as real wage inflation turns positive again. We see over 20% upside to our revised target price of 1525p.
Travis Perkins clocked strong lfl revenue growth in Q3. The Merchanting business (General Merchanting, P&H and Contracts segment) was up 4.7% yoy, led by strong growth momentum in Contracts. However, the consumer business slowed due to a subdued performance in Wickes. The ongoing momentum in Merchanting is likely to last for a few more quarters, but macro-economic headwinds (tighter credit availability + negative real wages) should soften the growth gradually. No change in our stock recommendation.
Travis Perkins ‘TP’ reported better lfl revenue growth (2.7% vs our estimate: 1.5%) in Q2 FY17, on the back of a strong performance in Contracts (+6.4% yoy; contributed c.21% to group revenue) and Consumer divisions (+6.5% yoy; contributed c.25% to group revenue). The growth was largely driven by improved customer propositions and the benefit of recent investment in the business. The General Merchanting ‘GM’ division was up marginally (0.3% yoy; contributed c.33% to group revenue), impacted by the company’s trading stance of preserving profit margins by passing on input cost inflation. The Plumbing & Heating (P&H) division remained in the red (-1.9% yoy; contributed c.21% to group revenue), due to a continued decline in social housing demand and reduced trade with a major customer. In H1 FY17, the group’s lfl revenue was up 2.7% while reported revenue advanced by 3.5%, underpinned by the scope impact (11 Benchmarx and 24 Toolstation branches opened during the period). Despite the stable gross margin (due to improved pricing activity to recover input cost inflation), the H1 FY17 adjusted operating profit slumped by 2.1% to £190m (in line with our estimate), impacted by a challenging P&H business (profitability down c.32%) and investment in store refitting and IT capability. The management outlined the next leg of the transformation plan for the ailing P&H division (further details in the analysis section). It also declared an interim dividend of 15.5p per share (+1.6% yoy) and maintained the FY17 guidance – effective tax rate: 20%, capex: £170-190m, property profits: c.£20m, finance charge: comparable to FY16. The management also remains cautious on the trading performance for the remainder of the financial year, largely due to mixed macro-economic indicators.
Travis Perkins, the UKs largest building merchant, has issued interim results for the six months to Jun-17. Overall headline numbers were broadly in-line, with earnings helped higher than expected property profits. Overall delivered LFL growth of 2.7% during 2Q17, in-line with 1Q17. However, investors are likely to focus on (1) cautious tone running throughout the statement (2) weak out-look statement and (3) yet another transformation plan in plumbing. I bet the current management team wish the old guard had never bought BSS. Ahead of the analyst meeting we are maintaining our HOLD recommendation. Though we flag the risk to our recommendation and forecasts are clearly on the downside.
Travis Perkins reported its Q1 FY17 trading update slightly ahead of our estimates. Lfl revenue increased by 2.7% (vs Q4 FY16: +2.5%, Q3 FY16: +2.0%; AV estimate: +1.6%), on the back of strong pricing activity at the group level and a solid performance in the Contracts business (+12.1% vs Q4 FY16: +9.2%, Q3 FY16: +5.7%; AV estimate: +3.0%; c.20% of group revenue). The segment’s growth was led by strong new build volumes and soft comparables (+2.1% in Q1 FY16). Plumbing & Heating (-1.1% vs Q4 FY16: -2.7%, Q3 FY16: -4.1%; AV estimate: -3.0%; c.22% of group revenue) and the Consumer segment (+2.9% vs AV estimate: +5.5%; -3.0% lfl impact of Easter falling in Q2 this year) also clocked satisfactory results. However, General Merchanting was down 0.3% (vs Q4 FY16: +0.3%, Q3 FY16: +0.6%; AV estimate: +1.0%; c.33% of group revenue), largely due to subdued demand and tough comparables (+4.7% in Q1 FY16). The reported revenue was up 4.9% (vs FY16: +4.6%; AV estimate: +2.9%), on the back of a +0.6% scope effect and +1.6% calendar day impact. Management remains watchful about the UK RMI market and expects to meet the FY17 guidance (capex of £170-190m, interest charge of c.£28m and 20% effective tax rate).
Travis Perkins reported FY16 results slightly ahead of our estimates. The lfl revenue increased by 2.7% (vs FY15: +3.8%; our estimate: +2.5%), largely driven by the strong performance in the Consumer (FY16: +6.4%, FY15: +5.3%, our estimate: +6.5%; led by Wickes and Toolstation) and Contracts divisions (FY16: +5.0%, FY15: +8.5%; our estimate: +3.5%; led by market share gains in the heavy civils and drainage market). The organic revenue growth in the General Merchanting division came in at +1.7% (vs FY15: +3.8%; our estimate: +2.0%), but the Plumbing & Heating division continued in the red (FY16: -1.6%, FY15: -1.4%; our estimate: -1.5%), on the back of subdued demand from the social housing replacement market and intensifying competition from online/fixed price merchants. The reported revenue was up 4.6% (vs FY15: +6.5%; our estimate: +4.8%), largely due to a +1.6% scope impact (net 25 branches opened during the year). The adjusted operating profit came in at £392m (vs our estimate: £384m), however, an impairment charge of £235m reduced the net profit to just £14m. A final dividend of 29.75p per share was proposed, taking the full year amount to 45p (+2.3% yoy). However, the company remains cautious about the UK outlook (anticipating higher cost price inflation, subdued consumer discretionary spending and lower secondary housing transactions). For FY17, management expects capex of £170-190m, an interest charge of c.£28m and a 20% effective tax rate.
Travis Perkins reported Q3 FY16 trading update below our estimates. Lfl revenue came in at 2% (vs our estimate: +3.4%; Q2: +2.3%, Q1: +4.2%), largely due to the softer market conditions in the General Merchanting business (+0.6% vs our estimate: +3.5%; Q2: +1.1%, Q1: +4.7%). The ongoing slump in the Plumbing & Heating business (-4.1% vs our estimate: +1.0%; Q2: -1.4%, Q1: +2.2%) further dragged down the top-line. However, the Contracts business sustained the strong organic growth momentum (+5.7% vs our estimate: +3.0%; Q2: 3.1%, Q1: 2.1%; c.20% of group revenue), whereas, the continuing investment in enhancing the range and store refitting (12 Wickes stores refitted in Q3; bringing the total to 50) propelled the consumer business to 6.3% lfl growth (vs our estimate: +6.5%; Q2: 6.4%, Q1: +7.3%; c.23% of group revenue). Total reported revenue increased by 3.4% (vs H1 16: 5.8%; our estimate: +4.9%), largely due to a +1.4% scope impact (net 23 branches opened during the quarter). Management guided FY16 adjusted EBITA to come in at slightly below current market consensus of c.£415m (our estimate: c.£407m). Additionally, 10 distribution centres and over 30 branches (including 15 Travis Perkins and 13 Plumbing & Heating branches) will be closed in the wake of uncertain consumer demand (post Brexit) and to enhance the supply-chain efficiency further. The company has also initiated a thorough review of the ailing Plumbing & Heating business and will discuss the results of this in mid-2017.
This time last year the building merchant sector delivered a number of profit warnings, with September-October sales disappointing. Unfortunately history appears to be repeating itself and Travis has warned that “Adjusted EBITA [will be] slightly below current market consensus of around £415m”. Given the uncertainty caused by the referendum we are not surprised (see our Brexit note of 22 July), when we moved our earnings estimates to below consensus.
Travis Perkins (TP) reported H1 FY16 results below our estimates. The lfl underperformance (+3.1% vs our estimate of +4.6%; Q2: +2.3%, Q1: +4.2%) was largely due to weak consumer demand in the wake of the Brexit referendum (deferment of projects by some large-scale contractors) and strong comparables (Q2 FY15: +6.3%). General Merchanting clocked an lfl growth of +2.9% (Q2: +1.1%, Q1: +4.7%; c.33% of total sales) due to lacklustre demand for heavy-side products during May and June. Plumbing & Heating was up 0.4% (Q2: -1.4%, Q1: +2.2%; c.23% of total sales), facing continuing pricing pressure in the end markets (particularly contract installers) and deflation in some of the product categories (mainly copper, steel and plastic tubing). However, the Contracts segment continued positive growth momentum of +2.7% (Q2: +3.1%, Q1: +2.1%; c.20% of total sales) on the back of business wins. Also, the growth in the Consumers segment came in at +6.5% (Q2: +6.4%, Q1: +7.3%; c.23% of total sales), propelled by a solid performance from refitted Wickes stores (currently 32 new-format stores out of 236 shops). The total reported revenue met our expectation at 5.8% growth, benefiting from the scope effect (+1.9%; net 14 new branches opened) and an additional trading day (+0.8%). The EBITA margin (excluding property profits) declined by 10bp yoy to 6.1% (60bp below our estimate). The operating leverage achieved in General Merchanting division was offset by pricing pressure in the Plumbing & Heating segment and the expansion of low-margin CCF branches. During H1, the company incurred capex of £120m (planned £200m in FY16) and declared an interim DPS of 15.25p (+3.4% yoy). Furthermore, management guided for a better Q3 (largely on the back of weak comparables), but remains apprehensive about short-term growth in the end markets due to expected sluggishness in the RMI, new construction and infrastructure spending amidst the Brexit uncertainties.
Interim results from Travis Perkins are slightly below our expectations at the earnings level (e.g. adjusted operating profit £194m 1H16 +4.9% vs PG estimate of £197m). FY16 guidance has been reduced to reflect uncertain (post Brexit) trading environment.
Travis has a preeminent position in many segments of the UK merchanting market. It has a strong brand and a well-executed operational strategy. This is reflected in consistent EBIT margins (6.6%-7.7% FY09-FY15) and healthy RoIC (average 11.7% FY09-FY15). However, the collapse in sentiment will undoubtedly impact on trading, it is just a matter of “by how much?” and “for how long?”
Travis Perkins released its trading update for Q1 16, slightly below our estimates and ahead of market consensus. The lfl revenue was up 4.2% (vs Q4: +1.4%, Q3: +2.6%, H1 15: +5.7%) on the back on better RMI activity; new space addition further propelled total revenue growth to +5% (+6.2% on a comparable days basis) vs our estimate of 6.9%. - General Merchanting: Lfl revenue was up 4.7% on the back of growth in the Benchmarx business, heavyside categories and timber (further supported by investment in new range centres). - Contracts: Lfl growth moderated to +2.1% due to strong comparators in Q1 15 (+15.1%; although a better performance qoq, Q4 15: -1.9%). The conversion of 13 Keyline branches to the Travis Perkins brand in January eroded segment revenue by 2.2%. - Consumer: The positive momentum in Wickes and market share gains (Toolstation and Tile Giant) pushed up lfl revenue by 7.3% (vs Q4: +6.1%, Q3: +2.3%, H1: +6.5%). - Plumbing & Heating: Q1 marked the inflection point for the Plumbing & Heating division following the completion of the store conversion process (PTS to City Plumbing). The lfl revenue recovered by +2.2% (vs Q4: -1.9%, Q3: +1.7% and H1: -2.9%) on account of good growth in the City Plumbing business (CPS), while sales at Plumbing Trade Supplies (PTS) remained flat. Travis opened five new Benchmarx showrooms and nine Toolstation stores during the quarter. Management reiterated guidance of 10% EBITA growth for the year.
Travis Perkins (TP) released FY15 results slightly lower than our expectations, with revenue up 3.8% on a lfl basis and 6.5% on a reported basis (vs our estimate of +7.2%) to £5,942m and adjusted EBITA of £412.6m (7.6% growth yoy vs 8% guidance). The lfl growth rate moderated to 1.4% in Q4 after 2.6% in Q3 and 5.7% clocked in H1 due to the weakness in the RMI market in the second half. However, the market has seen an uptick in demand during January and February, which management sees as sustainable and instrumental for the 2-3% growth in 2016 (see later for our view on this). In the General Merchanting business (+1% lfl in Q4 vs +1.7% in Q3 and +6.7% in H1), a strong growth in heavy-side products in H1 was partially offset in H2. Similarly, the Contracts division witnessed a slowdown in lfl growth of 1.5% (vs +5.5% in Q3 and +13.9% in H1); the good performance of Keyline and CCF businesses was offset by sluggishness in the BSS business (competitive pricing and commodity price deflation). Conversely, the Consumer division (the best performing segment) reported +6.1% lfl growth in Q4 (vs +2.3% in Q3 and +6.5% in H1), predominantly driven by strong kitchen and bathroom sales at Wickes and continued lfl growth and network expansion in Toolstation. The segment outperformed peers Kingfisher (B&Q: +4.4% lfl, Screwfix: +15.1% lfl in the quarter ended January) and Homebase (+3.3% in the quarter ended February) during the quarter. Also, the adjusted operating margin improved by 80bp yoy on the back of improved customer propositions in Wickes and Toolstation. The Plumbing & Heating (P&H) business continued to suffer from competitive pricing in the industrial plumbing market and accelerated restructuring (branch re-segmentation). The lfl revenue declined by 1.9% in Q4 (vs +1.7% in Q3 and -2.9% in H1). An impairment charge of £140.6m (PTS (£109.9m) and F&P (£30.7m) in the P&H business dented the net profit, which fell by c.35% to £167.7m during the year. Adjusted net profit for the year picked up by 10.8%, while the full-year dividend was increased by 15.8% yoy to 44p per share. For 2016, management expects to better the market growth of 2-3% by 1% and, coupled with 2% growth from new space, aims for headline revenue growth of 5-6%. Medium-term EBITA growth guidance was reiterated at 10%.
Travis Perkins (Hold) has issued a set of in-line FY15 results. Q4 like for likes highlighting slowdown in the UK construction market, though it must be stressed that most of the market remains in expansion mode. The one bleak spot was Plumbing & Heating which fell back into delivering negative like for likes, even despite easy comps. Investors will also be disappointed to see £141m impairment of PTS and F&P assets, due to challenging market conditions. Sales guidance for FY16 +5% to +6%, compares with +6% to +7% guidance given for FY15. Shares have found some support in recent weeks and we maintain our Hold recommendation.
Since we moved from Buyers to Sellers last summer the Travis share price has fallen by a fifth. The original bear recommendation was based on valuation concerns. Then the UK construction market wobbled and most in the sector warned, thereby providing a second leg down. The 12 month forward P/E has now contracted by 23% to 12.7x and is broadly in-line with previous support levels. Therefore, with no material negative catalysts on the horizon we are moving our recommendation from a Sell to a Hold.
With the blip seen in July and August across UK housing data, Travis Perkins Q3 15 trading update was no exception. Lfl sales growth moderated to 2.6% vs. 5.7% seen in H1 as demand slowed across all businesses in July and August. Nonetheless, management confirmed that it saw recovery in volumes in September and October, and expects demand to be sustained. - Sales growth in General merchanting abated to 1.7% during the quarter vs. 6.7% in H1 on the back of weaker volumes and less favourable pricing. - Consumer business grew 2.3% on a lfl basis vs. the strong growth of 6.5% witnessed in H1 as the DIY market remained challenging in July and August (reiterated as much in the Home Retail results as well). - Plumbing and heating returned to growth (+1.7%) vs. the 2.9% decline in H1 as the segment benefited from a weak comparative; however, market conditions remain tough and sales disruption is expected to continue until the end of the conversion programme (with 107 conversions done in 9M to take the total to 153 conversions of the 180 planned for FY15). - Contracts’ sales growth came in at 5.5% in Q3 as opposed to 13.9% growth in H1, with some pricing pressure In terms of outlook, due to the market weakness in the quarter, management now expects FY15 EBITA growth to be at the lower end of market expectations, i.e. close to £415m (+8% EBITA growth, from 10% guided earlier).
As with others in the sector, Travis Perkins is finding the trading environment in the UK tough. It has warned that it experienced weaker summer demand. However, it is putting a brave face on things and claiming that lead indicators point to a recovery during the fourth quarter. Santa may bring an early Christmas present, but we are not holding our breath. We are provisionally cutting FY15 PBT forecast from £395m to £375m. Given the deterioration in trading we are maintaining our Sell recommendation and reducing our target price from 1950p to 1650p.
As with others in the sector, Travis Perkins is finding the trading environment in the UK tough. It has warned that it experienced weaker summer demand. However, it is putting a brave face on things and claiming that lead indicators point to a recovery during the fourth quarter. Santa may bring an early Christmas present, but we are not holding our breath. We will be reviewing our (previously broadly consensus) forecasts following the conference call. But for now they are clearly under review. However, given the deterioration in trading we are maintaining our SELL recommendation and reducing our target price from 1950p to 1650p.
Interim results were greeted with mixed emotion. The shape of the growth was in-line with previous updates; full year's earnings guidance remained unchanged. The multi-brand strategy is clearly working, with most parts of the business winning market share. Investors have re-rated the shares (12 month forward PER increasing from 13x to >16x YTD). This puts the valuation broadly on par with Grafton and Wolseley. In the absence of any upgrades we think the PER could well contract in the short term. As a consequence, we are reducing our target price to 1950p (previously 2300p) and moving from Buy to Sell.
Travis Perkins is benefiting from the continued upswing in construction activity, with total sales growth of 7.8% (60 basis improvement vs 1Q and outperforming the overall market, which is growing 5%-6%). Excluding property profits EBIT is +9.0%. The broad portfolio of distribution brands is clearly performing well and given the near term macro environment we expect positive trends are maintained. Moreover, the on-going re-positioning of the network should provide further scope for operational outperformance.
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