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Entain Strong Q1; Stella David appointed as permanent CEO Travis Perkins Q1 lfl trends improve; Limited outlook Howden Joinery Positive start to FY25 trading; FY25 forecasts unchanged Breedon Group Lfl sales ‘fractionally ahead’; FY expectations unchanged WH Smith Near-term turbulence mars journey towards pure-play Travel Retail Economic view Strong mortgage momentum in Q1
TPK HWDN ENT BREE SMWH
Group lfl sales -2.1% (-2.2% vol / +0.1% price) Travis Perkins has published a short Q1 trading statement. At a Group level, Q1 sales declined 2.4% or -2.1% on a lfl basis. This was driven by a volume decline (-2.2%) whilst pricing/mix was broadly stable (+0.1%). Divisional Colour From a divisional perspective: i) Merchanting lfls continued to decline (-3.2%) albeit at a slower rate than what was experienced in Q424 (-5.8%). Merchanting volumes during the quarter declined by 3.1% whilst pricing stabilised (-0.1%); ii) In Toolstation, lfl trends remain favourable, increasing by 3.7% during the quarter. Volumes remained in positive territory (+2.5%) and there was also a modest (+1.2%) impact from pricing/mix. The Group notes that it continues to make good progress on “the delivery of maturity benefits and executing actions to enhance operating margin” within the division. No updated outlook/guidance provided Overall, whilst it comforting to see lfl trends moving in the right direction (albeit lapping easy comps from Q124), the lack of detail around current trading and outlook will leave the market asking questions. Given the explicit guidance/outlook the Group provided on April 1st with the FY results (“Expect FY25 adjusted operating profit excluding property profits to be broadly in line with FY24 excluding property profits”), we do not expect consensus to change materially at this stage.
Travis Perkins plc
We do not anticipate material changes to consensus following the update. The group remains an excellent turnaround opportunity, in our view, with scope for significant earnings recovery as the business builds back market share in Merchanting and the Toolstation estate matures. We retain Buy, TP 750p.
Our view Given it comes so soon after the delayed FY24 results, there are no surprises in the Q1 update with the key points as expected. Trading clearly continues to remain challenging, with Merchanting seeing lower volumes but with pricing stable. Overall, Merchanting is a little bit worse than we expected and Toolstation a bit better. Current FY25 consensus revenue assumes better trading later this year. It is difficult to see Merchanting get to flat LFL revenue for the full year, given this weak start, but Toolstation should be decent. At this point we would not expect FY25 consensus profit to change materially. Clearly the market is awaiting the appointment of a new CEO and will focus on how the underlying market evolves into H2 2025. Update summary The very brief Q1 update confirms that trading has remained challenging, with Q1 Group revenue down -2.1% on a LFL basis. In Merchanting, revenue was down -3.2% on a LFL basis with pricing having stabilised and volumes declining -3.1%. Focus remains on enhancing customer service. Toolstation had a solid first quarter with LFL revenue growth of +3.7% (pricing +1.2% and volume +2.5%). Toolstation continues to make good progress on the delivery of maturity benefits and executing actions to enhance operating margin. Valuation The shares are down by c.28% YTD and reside on FY25E PE and EV:Sales multiples of c.15x and c.0.42x respectively
The shares have fallen 30% YTD. At 494p, they trade on c.14x CY25E PE and c.5.5x EV/EBITDA, which falls to c.4x on a recovered earnings basis. While the road to recovery may not be smooth, we believe the group offers a compelling combination of macro recovery and self-help.
Our view. The shares have hit a fifteen year low on the back of the delayed FY24 results. We cut our estimates to reflect the weak FY25 guidance, with little growth now expected in Merchanting turnover, and margins under pressure from higher costs in a difficult market. The FY24 results were in line with expectations, albeit with net debt lower than expected. There is clearly substantial potential upside in profits over the medium term. The key issue from here will be how quickly the operational improvements show up in market share gains and better margins. Appointing a CEO will be important in order to provide clarity and momentum to the strategic direction. This year we expect net debt to reduce further, but it looks like another difficult year for earnings. We maintain a BUY rating, given the potential value, on the belief that the Group will continue to re-focus its strategy to outperform in what should be a better market over the medium term. Results summary. The delayed FY24 results were as expected, with adjusted Group operating profit of £141m (-23%). Revenue decreased by 4.7% to £4,607m due to weak volumes and price deflation, particularly in Merchanting where profits fell by 30%. Toolstation reported a robust adjusted UK profit increase of 47.8%. Adjusted EPS fell by 32.7% to 36.6p and DPS was cut by 19.4% to 14.5p. The IFRS16 leverage ratio improved to 2.5x, with net debt before leases reducing to be better than expected. Estimates. Looking ahead, the Board anticipates another challenging year in FY25 - expecting adjusted operating profit to remain broadly in line with FY24 levels - and we cut our estimates to reflect the new guidance. Valuation. The shares trade on FY25E PE and EV/EBITDA multiples of c.15x and c.6x respectively and an EV:Sales multiple of only c.0.4 times.
Travis Perkins Guidance for a flat Adj Op Profit implies DD FY25 d/grades Compass Group H1’25 preview: Solid H1 delivery likely, building US risks for H2 UK Economic view House prices flat in March amidst stamp duty hangover
Travis Perkins plc Compass Group PLC
The shares have fallen 23% YTD, and at 550p trade on 11.1x current earnings forecasts, through this rises to 15x based on the current guidance. While there is clearly much to do, Travis remains a scale player with significant turnaround potential. We reiterate Add, TP 900p.
Our view Delayed FY24 results are bit better than expected at the operating profit line and with net debt excluding leases being reduced significantly. This is a relief given initial concerns around the delay to the FY24 results. However, the outlook is worse than expected for FY25, with a difficult start for the Merchanting business, which is still seeing modest volume decline. The FY25 profit guidance implies a substantial cut of c.18-20% to FY25 consensus profit estimates. The shares have been very weak recently, but with the recent departure of the CEO and Merchanting still facing structural challenges, there remains significant uncertainty around the outlook for the Group and the weak profit guidance for this year will not be helpful today. Results summary FY24 results show adjusted Group operating profit a bit better than expected at £141m (-23%) and £152m including property profits. Revenue was 4.7% lower (-5.3% LFL) at £4,607m on weak volumes, price deflation and underperformance in Merchanting. Merchanting saw LFL sales decline by 6.8% and profit fall by 30% with margins at 3.9%. Toolstation total profit was £21m, with Toolstation UK profit up by 47.8% at £34m and a £12m loss in Toolstation Benelux. Toolstation France was closed. Group exceptional items were £139m. Adjusted EPS were 36.6p (-32.7%) and the DPS is cut by 19.4% to 14.5p. IFRS16 leverage is 2.5x, from 2.6x last year. Net debt before leases reduced by £123m to £191m. Outlook comments point to another difficult year with a mixed start to trading in 2025. Trading conditions in Merchanting continue to be difficult, with volumes still modestly lower but pricing stable. Toolstation has started the year more positively and continues to deliver good growth. Given the trading backdrop and the operational turnaround challenges, the Board expects FY25 adjusted operating profit to be broadly in line with FY24, excluding property profits. The Nominations Committee has commenced a search to identify the right long-term successor to Pete as CEO. Valuation Shares are down by 25% YTD and on our pre-existing forecasts reside on FY25E PE and EBITDA multiples of c.12x and c.6x respectively.
While further downgrades are clearly disappointing, we believe Travis remains an interesting turnaround opportunity with significant scope for self-help, particularly when it comes to recovering market share. We cut our TP from 980p to 900p but retain our Add recommendation.
Our view. The disappointing Q3 update demonstrated that the Group still has lots of work to do on improving the operational performance of Merchanting. Markets remain difficult although there are early signs that the market will be better from 2025, however the Group continues to lose market share and see margin pressure. Toolstation is performing more or less as expected. The new CEO has been very candid about the work still to be done in Merchanting and his focus on improving this area of the business. The medium-term investment case remains essentially the same as before – based on Toolstation UK delivering on its targets and Merchanting taking share in a recovering market with good margins. Understandably, there will be more questions around the medium-term potential of Merchanting with no financial benefit expected until H2 2025. We welcome the new CEO’s focus and honest appraisal of Merchanting and expect him to drive better operational performance. We retain our BUY rating on market recovery and a better operational performance but acknowledge that there looks to be a longer lead time of seeing an improvement in Merchanting. Cuts to estimates. We cut our estimates on a weaker Merchanting delivery. We now expect underlying operating profit (including property profit) of c.£134m (from £151m) for FY24E and £190m for FY25E. We expect leverage (post IFRS 16) of 2.5x this year, falling to 2.1x in FY25E. We also acknowledge some further downside risk around employee costs which may results from NIC changes in the budget. Valuation. The shares trade on a FY25E PE of c.17.5x and an EBITDA multiple of c.7.5x with a dividend yield of c.2.4%.
A tough third quarter, as much driven by share losses as market weakness, highlights the challenging job new CEO Pete Redfern has inherited. We believe the stock should be a cyclical recovery play at some point, but the question is when. For now we reiterate our Add rating and 980p TP.
Our view Another disappointing update makes it clear that there are serious ongoing structural problems in Merchanting which need fixing. It is good to see honest and candid comments addressing this from the new CEO. The loss of market share in Merchanting in Q3 results in a profit warning, with full year consensus adj.operating profit set to be cut by c.10%. As some green shoots of market recovery are increasingly evident, the key issue for the Group is how quickly and successfully the new CEO can deliver a better operational performance in Merchanting, with a financial benefit from H2 2025 looking the earliest opportunity. Q3 update – Another profit warning A poor trading update from Travis, cutting profit guidance again for the full year. Group revenue declined by 5.7% in Q3 with LFL revenue down by 6.8% in Q3 and by 5.6% YTD. Merchanting was much weaker than we expected. Merchanting LFL sales were down by 8.2% in Q3, with volume down by 7.4% as the Group lost market share over the summer; volumes and margins were weaker than expected despite efforts to optimize pricing strategy, and Specialist Merchanting saw competitive markets. Toolstation was more robust with LFL growth of 1% in Q3 and total revenue up by 1.7%, Toolstation UK was up by 2.7%. Toolstation France remains on track for full closure by the end of 2024. Given the shortfall in Merchanting, full year adjusted operating profit is now expected to be around £135m, (previous guidance was £150m). Overall, key end markets are stabilizing with some very early signs of recovery and positive growth expected over the next 12 months but the benefit to financial performance not expected until H2 2025. The new CEO, Pete Redfern, notes the Group has many strengths, but has allowed itself to become distracted and overly internally-focused, which has led to underperformance in recent periods and it needs to get back to operational focus. His immediate priorities are driving and incentivising branch-led performance. He will also take on the role of MD of the Travis Perkins General Merchant business to shorten reporting lines and develop a new strategy. Valuation Shares are up by 12% YTD and, pre-review, reside on FY25E PE and EBITDA multiples of c.16x and c.7x respectively.
Our view. We expect the Group to report that trading conditions remained difficult in Q3, with full year profit guidance unchanged. We would not expect the new CEO to say anything radical about further cost savings or strategy at this stage. He is more likely to focus on how they can improve, with added impetus, the underlying operational delivery across the Group. The focus from here is also likely to be on recent trends and what this might suggest for the nature of the anticipated recovery from FY25. Numerous macro lead indicators (see note) are pointing to better trading next year with a more normal price inflation backdrop. The valuation looks unstretched in the context of what the Group could deliver over the medium term, helped by market recovery, although the FY25E valuation is, arguably, pricing in some market recovery for 2025. The shares look well-placed as virtually a pure UK play on a residential recovery with a new, well-regarded management team. Q3 and estimates. Challenging trading conditions are expected to have continued in Q3. We expect Merchanting to have seen price deflation, albeit moderating, with timber deflation easing and the volume backdrop expected to have been sluggish, but with an extra working day. We expect Toolstation to have seen a similar outcome in Q3 as Q2 with LFL growth of c.2%, mainly price inflation. Overall, we would expect full year guidance to be broadly unchanged, with the market likely to focus on what the new CEO might say about his initial thoughts and the anticipated recovery from FY25. We tweak numbers with no material changes made to our estimates. Valuation. The shares trade on a FY25E PE of c.16 times and an EV:Sales multiple of 0.55 times. The valuation looks undemanding given the potential medium-term potential. Q3 update on 24th October 2024.
While the arrival of the new management team clearly carries the risk of an expectation reset, we believe it will be a positive catalyst. The shares trade on c.14x CY25E PE, but recovered earnings could be >2x the FY25E level, implying a c.6.5x multiple.
Guiding an FY24 outturn of £150m vs GBS at £155m and cons at £169m Travis Perkins has published H1 results reporting an EBITA of £38m (-64.5% yoy). At a Group level, lfl sales weakened in Q2 (-6.1%) versus Q1 (-3.7%) with merchanting lfl sales -7.9% in Q2 versus -4.2% in Q1 and Toolstation lfl sales +2.2% in Q2 versus -0.9% in Q1. Travis Perkins notes weak demand generally across its key end markets which has been coupled with commodity price deflation. The Group has made “good progress” in addressing loss-making activities and expects to exit Toolstation France by year-end whilst a strategic review of Toolstation Benelux is said to be complete with actions in place to deliver break-even performance in 2025. Although the financial performance is expected to improve in 2025 (new UK government will encourage more house building and infrastructure improvements coupled with reducing interest rates and self-help), H224 will remain challenging and Travis Perkins expects demand in H2 to be similar to that in H1. With that in mind, management is guiding for an FY24 adjusted operating profit of c.£150m, which includes £5-10m of property profits and a loss of c.£16m in Toolstation France. We will downgrade our forecast of £155m by £5m while consensus currently stands at £169m and thus the downgrade to consensus will be in the order of 11%. Lower volumes and deflation lead to weaker merchanting margin In terms of the results themselves, revenue came in at £2.36bn (-4.4% yoy). This was due to a 5.8% decline in revenue in the merchanting division to £1.94bn whilst Toolstation revenue increased by 2.4% to £420m. Post adjusting items of £32m (of which £10m is cash), Travis Perkins delivered a statutory operating profit of £38m. Divisionally, lower volumes and price deflation impacted merchanting gross margins and saw operating margins taper by 160bps yoy whilst Toolstation UK actually delivered a margin improvement of 130bps performance (but as expected there was a loss in Toolstation Europe of c.£4m). Leverage at year-end increased to 2.7x, up from 2.1x in H123. Conference call details Management will host an in-person presentation at 8:30am. Alternatively, a webcast can be accessed via the investor relations website.
While the backdrop is clearly challenging, one must not lose sight of the fundamentals. The group operates market-leading positions, is geared into cyclical recovery, and has good cash characteristics. Further, a new management team could provide a catalysts. We reiterate Hold, TP 840p.
Our view Trading conditions have clearly remained weak, with Merchanting seeing a deterioration in Q2 impacting gross margins and profits. Toolstation UK has delivered broadly as expected. The Group is lowering profit guidance for the full year; while not a complete surprise, the scale of the reduction is greater than expected. We would expect consensus full year profit expectations to be cut by around 10-12%. It is also disappointing not to see any definitive news on France, although it seems it is just practically taking time to close and exit this business, with an exit expected by the end of 2024. Toolstation Benelux looks to be retained within the Group, which may surprise some. Results summary A weak H1 together with a profit warning for the full year. A continuation of trends seen in H2 2023 in H1 2024 led to H1 revenue of £2,362m, down by 4.4%. LFL revenue was down by c.5%, equally on weak volumes (-2.4%) and price deflation (-2.6%). Group adjusted operating profit fell by 33% to £75m, which was lower than our forecast of £82m. Merchanting was weaker than expected with profits down from £130m to £91m (-30%) with a margin of 4.7% and a worse Q2 (LFL sales –7.9%) versus Q1 (LFL -4.2%). Group saw continued market share gains in Toolstation UK with LFL sales up 0.7% and with the operating margin up 130bps and Toolstation UK saw operating profits improve to £14m (+55%). Underlying EPS down by 48% to 15.9p with the interim DPS at 5.5p, down by 56%. Net debt reduced by £54m, but leverage increased to 2.7 times. Full year profit guidance is reduced to £150m (Inclusive of £5-10m of property profits and c.£16m losses in Toolstation France) from a previous range of £160m to £180m. On track to exit Toolstation France by the end of 2024. Strategic review of Toolstation Benelux complete with actions in place to break-even performance in 2025. New CEO joins in September. Valuation Shares are flat over the last twelve months and on our existing forecasts reside on a FY25E PE of c.14 times with a dividend yield of c.2.8%.
Our view. We revisit our valuation after the latest bounce in sector share prices. While the trading backdrop in 2024 continues to look subdued, and we expect little volume benefit this year, we continue to see significant medium-term potential share price upside. With a general expectation of UK interest cuts this summer, there is arguably more visibility that we are at, or close to, the trough for UK residential markets. The Group is intensifying its focus on transforming its operating model. It had already announced cost savings of £35m and is now taking a more fundamental look at underperforming businesses within the Group, with more emphasis on operational efficiencies generally. We remain convinced by Toolstation UK and significant profit recovery potential in Merchanting, likely to be underpinned by more focus on efficiencies. With more operational focus, and with an exit from France looking inevitable, we believe the medium-term potential value is attractive, with EPS of over 120p possible over the medium-term. We reiterate our BUY and adjust our price target higher to 930p (from 810p) to reflect our confidence in the medium-term potential. Estimates. The Q1 update confirmed that trading remained difficult, and we continue to expect operating profit estimates for FY24E and FY25E of £170m and £228m, respectively. We expect net debt of £250m by end-FY24E implying leverage (IFRS16) of 2.4 times. If the Group exits France, as we expect, continuing operating profits would increase by £20m.
''Why does it always rain on me?'' sang Travis in their hit single in 1999. Following multiple profit warnings, restructurings, CAPEX cuts, dividend cuts, and management changes, shareholders of Travis Perkins may be feeling the same. We think it''s time to change the tune. UK macro is (slowly) improving, leading indicators look to have bottomed, and valuation is compelling. The road may be bumpy - indeed we lower our ests to factor in FY23 - but with reset expectations and better expected macro and FCF, our TP rises, implying 33% upside. We see good risk/reward and upgrade to OP. UK macro has gone from bad to less bad We''re not out of the woods...but the forest is less dense. Although monetary conditions have tightened in recent months, they are more supportive than a year ago. Moreover, UK housebuilders are sounding increasingly upbeat, and leading indicators on housing and consumer sentiment are turning. Is it a value trap? No - look at the bigger picture Many clients are concerned Travis is a value trap. We don''t think so. TPK is the leader in UK distribution with an attractive competitive position. Smaller family-owned competitors lack the scale to compete with TPK''s level of service. Private equity backed peers are busy taking cost out. Against this backdrop, TPK could gain market share. At 0.4x EV/sales 25E, shares are 38% below the long-term average. Our FCF-based TP implies 33% upside; and our SoTP implies +37% upside. Estimates have reset (including ours). We upgrade to Outperform We think FY23 marked the bottom for Travis results. Lfl comps improved sequentially in 1Q24 with volumes surprising positively. Not much has to go right for Travis to surprise positively. We belatedly lower estimates to integrate full year 2023, but still stand +6%/+23% ahead of FY24 / FY25 consensus (also updated). Our FCF-based TP rises to GBp1011 (from GBp819). Upgrade to OP.
The shares trade on c.17x CY24E earnings, which falls to c.11x in CY25E. On a fully recovered basis, this would decline to c.5.5x earnings. We sense there is value to be unlocked in Travis Perkins, but this would require a better market backdrop and more active portfolio management. We reiterate our Hold recommendation and 840p TP.
Travis Perkins has reported adjusted FD EPS of 45.0p for FY23, 52% lower than in FY22, because of the downturn in the new build housing and RMI markets. Operating losses in Toolstation Europe increased in the year as both the France and the Benelux businesses disappointed. Management is undertaking significant actions to build a stronger business, including a plan for a potential exit of Toolstation France, which delivered an operating loss of £18m in FY23. Demand is expected to remain weak through FY24 with the housing market remaining sluggish. We have lowered our FD EPS estimates by 32% and 22% for FY24 and FY25 respectively and have lowered our target price from 777p to 725p. We maintain our Hold rating.
The shares trade on c.17x CY24E PE, falling to c.11x in CY25E. If the group were to exit Toolstation Europe, we estimate these valuations would fall to c.14.5x and c.10x, and on a fully recovered basis, the shares trade closer to 5-6x PE. Our TP is unchanged at 840p, and we retain our Hold rating.
Our view. Against a weak trading backdrop, the Group is intensifying its focus on transforming its operating model. It had already announced cost savings of £35m and is now taking a more fundamental look at underperforming businesses within the Group, with more emphasis on operational efficiencies generally. We cut our estimates significantly for FY24E, but the key issue for the business case remains what the medium term recovery potential and delivery looks like. We remain convinced by Toolstation UK and do not see why, with market recovery, Merchanting cannot reach margins of close to 8%. With more operational focus, and with an exit from France looking inevitable, we believe the medium-term potential value is attractive, with EPS of over 120p possible over the medium term. We reiterate our BUY. Results summary. The results were in line, with adj. operating profit of £180m. It has announced that it is addressing some poorly performing parts of the Group, including a potential exit of Toolstation France, a strategic review of Toolstation Benelux and its Benchmarx business, as well as intensifying its focus on operational efficiencies. The expected changes to the business model should structurally improve Group profitability, returns and growth. DPS was cut to 18p (-54%). Estimate cut. We cut our adjusted operating profit estimates for FY24E and FY25E to £170m and £228m respectively. We expect net debt of £250m by end-FY24E implying leverage (IFRS16) of 2.4 times. Clearly if, as we expect, the Group exits France, continuing operating profits would increase by £20m. Valuation. FY24E EV:Sales multiple of c.0.5 times.
Our view No big surprises in the results, with profits in line and a substantial DPS cut. The focus will be on the various initiatives underway. The big news, perhaps not unsurprising, is that the Group is working on a potential exit of Toolstation France. With markets expected to be weak this year, the Group is focusing on self-help. Mid-point of FY24 profit guidance implies a c.11-13% cut to adjusted operating profit. Guidance assumes £10m of property profits (c.£10m lower than we have in) and a £20m loss in Toolstation France so, if the loss in France is removed, guidance would be less severe but that is yet to happen. Overall markets remain weak, but the Group is clearly now on the front foot of transforming itself which should support improved financial delivery. Results summary No surprises in the FY23 results with adjusted Group operating profit in line with expectations at £180m (-39%). Revenue was 2.7% lower (LFL -3.1%) at £4,862m on weak volumes and a rapid fall off in price inflation in H2. Adjusted EPS of 45.7p (-51.7%) and the DPS is cut by 53.8% to 18.0p. Leverage is 2.6x (1.8x). The update reiterates its non-branch cost savings in Q4 2023 with £35m annualised savings expected. The Group also states that it is working on a plan for a potential exit of Toolstation France and a strategic review of options for Toolstation Benelux. It is optimising the Benchmarx branch network with 39 branches closed. It continues to rationalise the Toolstation UK supply chain along with working on several other structural efficiencies across the Group. Outlook comments point to another year of weak demand and pricing is expected to be minimal in 2024. While early in the year, the Group has seen a continuation of the weak trading seen in H2 2023. The Group guides to adjusted operating profit in the £160m-£180m range for FY24, inclusive of c.£10m of property profits and c.£20m of losses in Toolstation France. The mid-point of the FY24 profit guidance would imply a c.12% cut to consensus. Valuation The shares are down 10% YTD and reside on a FY24E PE of c.13x with a dividend yield of c.3%.
The shares are trading on c.13.3x current earnings estimates, which rises to 15-18x once the above cuts are factored in. A successful resolution to Toolstation Europe could be a positive catalyst, as could an accelerated cost-cutting programme in the Merchanting business. We reiterate our Hold rating and 840p TP.
The shares have lagged the sector in recent months and trade on 13.3x CY24E earnings with an 8% FCF yield and 4% dividend yield. While there may be some deep value in the shares at this level, they are somewhat lacking a catalyst at this point.
Our view Today’s update is concise, but there is a lot in there. Clearly volumes remained weak in Q4, but, reassuringly, pricing stabilised, with full year 2023 profit expected to be just below the middle of the guided range at c.£180m (range £175m to £195m). The Group has taken a good look at immediate cost initiatives to reflect the weak trading with a significant £35m of annualised benefits expected from actions already taken. Some would argue this is a bit of catch up given the weak trading seen over the last 12 months. This looks to be only the start with the Group having a closer look at the business with further action likely (it seems Toolstation France is under more scrutiny, for example). Despite the cost savings, we would not expect FY24 consensus profits to change materially given the trading outlook – H223 profit run rate times two plus cost savings of £35m broadly gets to current consensus. Trading still remains challenging, but the market should welcome the more proactive focus on costs and operations. Update summary The update confirms that Q4 trading was in line with management expectations with pricing stable versus Q3 and with volume remaining challenging. The Group therefore expects to deliver FY23 adjusted profit of £180m, in line with previous guidance. Given markets are expected to remain subdued in FY24, management is accelerating plans to continue the transformation of the business which has been a constant focus in recent years. The work commenced in Q4 with a headcount reduction in the centre and regions alongside efficiencies across its supply chain. These actions are expected to deliver annualised savings of around £35m and result in a one-off restructuring cost of £15m in FY23. These initiatives represent the first steps in a programme of planned changes to the Group’s operating model which will focus on simplifying how the Group businesses interact with each other, reviewing the impact of loss-making activities, and maximising scale benefits. A further update will be provided at the time of the results on 5th March 2024. Valuation Shares are down by c.25% LTM and reside on an FY24E PE of c.13x, EV/EBITDA c.7.3x and an EV:Sales multiple of c.0.5x
Lower forecasts means our target price falls from 900p to 840p, and we retain our Hold rating. Positive catalysts look hard to come by currently, but this could change rapidly should the UK’s economic backdrop begin to improve, at which point we would expect the shares to re-rate rapidly.
Initial Equity Trading Comments - 12 October 2023
TPK MRK MONY NXR DEBS RTN OXIG ASC BRK SBRY NBRNF
Travis Perkins pulled its Q3 trading update forward by two weeks to flag a deterioration in the outlook. It cut its FY23E guidance from £240m operating profit to £175m-195m, as prices and volumes weakened for Merchanting and its gross margins came under pressure. The weak market, easy availability of product and commodity price deflation combined to make the market more competitive than for some time. We follow guidance and cut 23E and 24E EPS estimates by 31% and 19%. The stock market had anticipated this after cautious comments from peers, so the share price fall was limited. The shares look undervalued here given the opportunity in Toolstation, freehold property and recovery potential in Merchanting, but we stay at hold until the pathway to recovery becomes clearer and gross margins stabilise, after the 150bp hit in 2023.
In an ad-hoc press release, Travis Perkins has announced its Q3 FY23 trading performance (-1.8% lfl) and issued a profit warning for the full year – FY23 adjusted EBIT is now guided at £175-195m (vs £240m previously). Weak trading in September and commodity price deflation are likely to dent the near-term performance. However, the fundamentals are still sound and TP should rebound from the H2 FY24. We will reduce our target price by 7-10% but the valuation remains attractive at the current levels.
Our view. It is clearly disappointing to see full year profit guidance cut again but not a complete surprise (albeit the scale of the warning was bigger than expected) given the weak market backdrop. The essence of the medium-term investment case remains unchanged, in our view, albeit with more disappointing near-term trading and recovery more likely coming from 2025, with the FY24 profit outcome expected to be weak. The balance sheet is very comfortable, supporting the Group in delivering its medium-term potential. Update summary. The Q3 update confirmed lower full year profit guidance, essentially on weaker pricing and gross margins in Merchanting. Group LFL revenue declined by 1.8% in Q3, with Merchanting LFL revenue down 2.9% in Q3. Merchanting volumes were flat in Q3, but pricing was -3% as the company adjusted pricing to be competitive in a weak market. Toolstation continues to trade as expected, with Q3 LFL growth of 4.4%. Full year adjusted operating profit is now expected to be £175-195m (from c.£240m). Estimate cuts. We make substantial cuts to our profit estimates and now expect adjusted operating profit (including property profits) of c.£181m for FY23E and c.£206m for FY24E. Our cuts are only in Merchanting to reflect stock losses and gross margin pressure with our Toolstation forecasts unchanged. We expect modestly lower FY24E profits in Merchanting on flattish volume, with lower gross margins offset by some cost efficiencies. FY24E profit growth comes from Toolstation. Our FY23E net debt forecast is broadly unchanged with IFRS 16 leverage at c.2.5x. Valuation. There clearly remains attractive medium-term potential value in the shares, trading at an FY24E PE of c.12x and EV/Sales of c.0.48x.
Travis Perkins^ (TPK.L, Sell at 743p) - Further profits warning
Our view Full year profit guidance has been cut significantly. It seems this is mainly due to weaker gross margins in Merchanting with the Group focusing more on volume and market share in Merchanting and therefore having to adjust prices in a persistently weak overall market backdrop. The LFL sales decline in Merchanting in Q3 is broadly as expected, but with pricing weaker and volumes better and clearly weaker gross margins. Toolstation appears as expected, with no change to full year expectations. Full year 2023 consensus profit clearly will see material cuts today from £240m to c.£175m to £195m. It is a very difficult market and Travis is having to adjust pricing to reflect that, which is impacting margins. Update summary Q3 Update lowers full year profit guidance, essentially on weaker gross margins. Market conditions remain challenging, with continued weakness in new build housing and domestic RMI persisting into Q3. The Group has also suffered significant commodity product deflation. Group revenue declined 1.8% in Q3 with LFL sales also down 1.8%. Merchanting LFL revenue was down 2.9% in Q3, a slight improvement on H1. However, the drivers have shifted - pricing declined 3.1% due to deflationary pressures on commodities, impacting gross margins. Merchanting volumes were flat in Q3 as the company focused on driving volume through service and competitive pricing. Toolstation continues to see good growth: UK +7% and Europe +9% in Q3, with LFL growth of 4.4%. Full year adjusted operating profit is now expected to be £175-195m, revised down from previous guidance (c.£240m) due to commodity deflation and the challenging market exit rate from Q3. Valuation Shares have been weak, down 9% YTD, and, on our pre-existing estimates, reside on an EV:Sales multiple of c.0.5 times and PER of c.10 times for FY24E.
The shares have been flat in the last month, a slightly better than the sector. The share trade on 11.6x current consensus earnings for CY23E, though this will rise to 15-17x based on the revised guidance. The trajectory into CY24E is clearly now key and we expect to see numbers cut here too. We reiterate our Hold rating and 900p target price.
Compelling business model. Management presented a convincing, credible case for why they remain very confident in the Toolstation UK business model. Toolstation UK has invested in a strong national network, an impressive supply chain, and digital offering, with significant profit growth and maturity benefits to come. The business looks well placed to grow its 7% market share within a large addressable market of c.£10.5bn. An increased focus on serving Trade customers will support the Group’s targets. Toolstation is clearly an integral part of the Group and complements the Merchanting division with a customer proposition to its larger customers and more choice for SMEs. The investment in the impressive new DC supports growth targets. Financial metrics and targets. There is a clear pathway to grow revenue to c.£1bn by 2027 with operating profit of c.£80m as stores grow from 563 to 650. Improving operating margins to 8% will come through the maturity of sites, improving gross margins (+200bps) and overhead efficiencies with a more efficient cost to serve (c.300bps). Around 50% of the current stores are less than five years old, with the more mature stores contribution margin reaching c.20-25% per store. The focus is on delivering these medium-term targets, but there is clearly scope for further growth beyond 2027. 2023 will see incremental net distribution costs of c.£13m from dual running and one-off costs. Conservatively assuming Toolstation Europe is breakeven by 2027, the profit delta of Toolstation from 2023 to 2027 is over £90m. Valuation. Assuming the Group successfully delivers its 2027 targets, we would estimate the Toolstation potential 2027 valuation at c.£800m, or c.£550m-to-£600m in current money. The 2024E PE multiple is only c.10 times.
While Travis Perkins continues to perform well in the Toolstation business (volume growth and market share gains), the Merchanting segment remains a mixed bag. Given the profit warning of mid-June 2023, the weakness in the UK residential segment came as no surprise. We expect the inflationary headwinds and margin pressure to ease in H2 FY23. The management reiterated its annual operating profit guidance which is a reassuring for market sentiment. We maintain our positive recommendation.
Travis Perkins’ H1 results were impacted by challenging market conditions, as expected. The highlights were accelerating growth in Toolstation as its UK trade offer gathers momentum and relative resilience in Merchanting due to continued cost discipline. Cash conversion was good as working capital was unwound. The H1 dividend was held to reflect the strength of the balance sheet, cash flow and confidence in the medium-term outlook. Operating profit estimates are broadly unchanged, but EPS cuts follow a higher than expected tax rate. The group is well placed for recovery when it comes, and the valuation undemanding. We increase our target price to 900p from 840p as demand is stabilising, but upside and better share price performance will be missing until recovery is clearer.
Summary of H122 results Sales came in line with consensus whereas adjusted operating profit (ex-property gains) came in at GBP103m which was -7% below VA consensus. This was driven by additional GBP7m of costs in Toolstation associated with the new Pineham distribution centre in the UK and slightly lower property profits relative to expectations. Merchanting performed in line with market expectations. Key news The group had already downgraded FY23 profit guidance to GBP240m on 16th June on the back of weakness in residential RMI and new build markets. Visibility here remains low - especially in 2024. Commercial, industrial, and public markets have held up better. Pricing in merchanting has come down slightly ahead of expectations due to weakness in commoditised inventory - namely timber. Toolstation''s profitability should improve as the Netherlands reaches breakeven although the GBP30m loss expected in Europe could be a touch lower. Leverage has crept up beyond management''s target range to 2.1x (target: 1.5x to 2.0x) which is primarily a result of leases for the new Toolsation distribution centre. Management are relaxed about this and see financial leverage as being under control with net debt / EBITDA of 0.8x ex-leases. Earnings We tweak our earnings estimates by +2% / +1% for 2023 / 2024 after incorporating today''s results and comments on the call. We now sit -4% below FY24 consensus operating profit. Rating and target price We reiterate our Underperform rating and leave our target price unchanged at GBPp810. We continue to see a bumpy road ahead on the back of UK macro risks as documented here. Investment case UK macro risks are mispriced after the recent rally.
Our view. Trading continues to be difficult, but management’s full year profit guidance is unchanged, and we keep our estimates broadly unchanged. Arguably the real focus is now on trading in 2024 with macro risks to volume from high interest rates pushing the economy into recession and price inflation being less of a tailwind for the Group. However, assuming UK inflation fears and interest rate expectations continue to ease, flattish market volumes next year for merchanting looks a reasonable view and profit recovery in Toolstation should be supportive for the shares given the undemanding valuation. Hopefully the Toolstation CMD in September will provide more confidence in profit recovery for that business and over the next few months inflation fears continue to ease. We maintain our BUY rating with a price target of 975p (prev. 940p). Results summary. A broadly in-line set of H1 results, with no change to the full-year profit guidance. H1 revenue was down by 2.5% (LFL -3.2%) to c.£2,472m, with adjusted operating profit of £112m (-31%). Merchanting saw adjusted profit fall by 23.5% to £130m. Toolstation saw revenue up by 9%, but delivered an operating loss of £10m (UK profit of £9m), which included a bigger-than-expected c.£19m loss in Europe. Adjusted EPS fell by 41% to 30.5p and the DPS was held at 12.5p. Pre-IFRS16 Net Debt was as expected, at £274m. Outlook and estimates. As previously guided, full year adjusted operating profit is expected to be around £240m. We only tweak our forecasts. We expect a slightly bigger loss in Toolstation and lower price inflation, but slightly better volume in Merchanting for the full year; overall, our operating profit forecast remains in line with the guidance of c.£240m. IFRS16 leverage c.2x for FY23E. Valuation. Shares reside on a FY24E PE multiple of only c.11x, but the real value in the shares continues to be looking out to the medium term.
Travis Perkins’ Q2 and H1 FY23 performance was broadly in line with our expectations. In Q2, lfl sales declined 3.3% yoy, as the robust momentum at Toolstation was more than offset by the continued weakness in the merchanting business. Although the adjusted operating profit declined 31% to £112m, EPS was slightly below our expectations. The interim dividend of 12.5p is 12% ahead of our expectations. We maintain our positive stock recommendation.
Travis Perkins^ (TPK.L, Sell at 871p) - FY23F guidance retained but Toolstation risks
Our view The half-year results are essentially in line with our expectations, albeit with a slightly bigger loss than expected in Toolstation Europe, and the interim DPS was not cut but was held flat. It seems recent trading and the outlook is also broadly as expected, albeit with price inflation seemingly slowing a bit faster than previously expected, and the H2 volume decline is not expected to be as bad as previously expected. Overall revenue for the full year is still expected to see a low single-digit decline and, given the reiteration of full-year profit guidance of £240m, we would not expect any material change to consensus FY23 estimates. Results summary An in-line set of first-half results, with no change to the full-year profit guidance. H1 group revenue was down by -2.5% to c.£2,472m, with LFL growth of -3.2% (Q1: -2.9% and Q2: -3.3%). Adjusted group operating profit of £112m (-31%) was a smidgen better than our £111m forecast. Divisionally, Merchanting saw a -4.5% fall in revenue with adjusted profit falling by -23.5% to £130m (with an operating margin of 6.3% from 7.9%) and was broadly as we expected. Toolstation saw revenue up by +9% but delivered an operating loss of £10m (UK profit of £9m), which was a slightly bigger loss than we expected, driven by the bigger-than-expected c.£19m loss in Europe. Adjusted EPS fell by -41% to 30.5p and the DPS was held at 12.5p. reflecting the strong balance sheet. Covenant net debt was as expected, at £274m, with leverage of 2.1 times. At a group level, revenues are expected to remain in low single-digit decline through the second half with pricing showing low single-digit growth and volumes in mid-single-digit decline, with new housing and RM&I markets remaining subdued. As previously guided, full-year adjusted operating profit is expected to be around £240m. Valuation Shares are up by +10% over the last month and are on a FY24E PE of c.10.7 times and an EV:Sales Multiple of only 0.52x.
Having negatively revised expectations in June, the interims contain few real surprises. Residential markets remain challenged, while the longer term contracts seen in commercial/infrastructure are better. With unchanged expectations and an undemanding valuation, the shares could see some strength today, in our view. We reiterate our Hold rating and 900p TP.
Initial Equity Trading Comments - 11 July 2023
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Travis Perkins^ (TPK.L, Sell at 810p) - Merchanting - what goes up must come down
In an unscheduled trading update, Travis Perkins reported that in light of ongoing challenging market conditions, full year 2023 EBIT is now expected to be c.£240m. This is 11% below consensus at the time and 9% below where we had set our forecast. Based on our updated estimates, which are in line
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Travis Perkins^ (TPK.L, Sell at 809p) - FY23F profits warning
Travis Perkins’s unscheduled update guided to 2023 EBITA of £240m, around 9% below consensus. Demand was worse than expected in residential RMI and new build, but is as expected in the non-residential and infrastructure segments and Toolstation is on track. The weakness in new residential is known, and we observe that it has a bigger weighting with smaller builders, where planning delays and uncertainty have probably hit hardest. The disappointment on residential RMI appears to be the absence of a pick up in sales despite softening comps, and it is surprising that Toolstation is on track and General Merchanting behind, perhaps suggesting that large projects are worst impacted by more uncertainty. The shares look cheap on 12% FCF yield, but will need stabilising trends before re-rating. We maintain our HOLD rating and lower our TP from 900p to 840p.
Travis Perkins has issued a profit warning. FY23 adjusted operating profit is guided at £240m, which is 11% below the consensus. This is attributable to high interest rates and price inflation, which has resulted in softer than expected consumer demand in the UK’s residential segment (includes both new build housing and private domestic RMI markets). While the near-term performance remains under pressure, we do not see any structural issue with the business. We will reduce our estimates but maintain our positive recommendation.
Alongside the cuts to our numbers, we are reducing our TP to 900p, but leave our Hold rating unchanged. The shares now trade on 12.2x revised FY23E PE, and despite having no real balance sheet issues, we see few positive catalysts on the immediate horizon.
Our view. Clearly the group is not seeing the easing of trading conditions it expected, and needed, to meet full-year profit expectations. With UK interest rate expectations moving higher and consumer confidence weak, it is not wholly surprising that profit guidance has been cut. The market’s focus is clearly moving to a poorer near-term trading outlook and earnings risks on macro issues. While less confidence in earnings estimates is understandable, we would caution becoming too negative as sector share prices would likely be boosted if the market’s expectations on interest rates prove to be too high and reverse. Toolstation trading is in line with expectations, with our profit cuts mainly hitting Merchanting. A flat H2, year on year, is now implied in our full-year estimates. Over the medium term we continue to be believe, as it delivers on its strategy, the group offers attractive value. We keep our BUY rating. Update summary. The group put out an unscheduled trading update, warning on full-year profits. Trading profit for the FY23 is now expected to be c.£240m, which was around 11% below consensus expectations. The warning is a result of the fact that the group has not seen the anticipated easing of market conditions in Q2 to date, with the implied H2 outturn looking too optimistic. Revised lower estimates. We have cut our profit estimates mainly on lower volume assumptions for the full year, but with gross margins cut by a smidgen too. Most of our cut relates to Merchanting, with a modest edging back of Toolstation UK profits, on lower market volume assumed. We adjust our FY23E underlying profit forecast (inc. property profit) to c.£240m, which is a c.11% cut. Valuation. Shares reside on a FY23E PE multiple of 11.3x, but the real value in the shares continues to be looking out to the medium term, with the expected benefit from a more mature Toolstation and with Merchanting performing well.
Travis’ shares have been weak (-6%) over the past month, suggesting today’s announcement was not unexpected. Looking across the wider sector, a combination of either broader geographic exposure, an element of pricing power, or self-help on the cost base is likely to be required to avoid a similar fate.
Our view A disappointing unscheduled update from the Group this morning. Trading in Q2 to date sounds as though it has continued to be challenging and similar to Q1 which saw Group LFL sales of at c.-3%. Consensus trading profit for the full year is likely to move to c.£240m on the revised guidance, which would be a c.11% cut. Assuming the Group delivers c.£110m for the first half, a full year expectation of £240m would imply a flat profit performance in H2, year on year, helped by an easing comparative. Clearly, with H1 trading remaining challenging and the recent moves in interest rates, the outlook and challenge of delivering H2 expectations has deteriorated across the sector and today’s profit warning, while clearly disappointing, is understandable in that context. In the near term, the focus is likely to return to the weaker profit outcome this year and worries around rising UK interest rates rather than the medium-term potential. Trading update summary The Group has put out an unscheduled trading update, warning on profits for the full year. Trading profit for the full year FY23 is now expected to be c.£240m, which is around 11% below the current consensus expectation. The warning is a result of the fact that the Group has not seen the anticipated easing of market conditions in Q2 to date. New housing and the RM&I markets continue to be impacted by higher interest rates and weak consumer confidence. Non-residential markets are proving more resilient and Toolstation continues to perform in line with market expectations. Assuming the present conditions persist for the balance of the year, management now expects to deliver a full year adjusted operating profit of around £240m. Group continues to focus on its operational efficiencies and carefully targeted investment continues. Valuation Shares are flat YTD and reside on a FY23E PE of c.10.5 times and an EV:Sales multiple of c.0.53 times on our pre-existing estimates.
Q1 revenues declined by 1.5%, with like-for-like revenues 2.9% down year on year. This means Travis Perkins is on track to deliver revenues and profit in line with 2023 guidance. Demand from residential RMI and new build has pulled volumes in Merchanting down 13% in Q1, but may now be past the worst, and non-residential demand was much more resilient. We have nudged our estimates down a little, bringing them into line with consensus. The shares look cheap, especially on a sum-of-the-parts basis, but a re-rating will need stabilisation of residential RMI activity.
Travis Perkins’ Q1 trading performance was slightly below our expectations. Group’s lfl sales came in at -2.9% yoy (vs our estimate of -2.0%), mainly due to the merchanting segment (-4.2% yoy). The company has launched a new proposition (called Whole House), which is targeted to capitalise its scale and knowledge with house builders. Management is comfortable with the market consensus for FY23. We do not expect any major changes in our financial estimates and target price.
While the shares are not expensive, trading on a PE of 11.8x for FY23E, we struggle to get excited about the potential for growth over the medium term. We see more interesting plays elsewhere in the sector, and the stock remains a Hold, TP 1,070p.
Travis Perkins^ (TPK.L, Sell at 959p) - Q1 performance supports SELL stance
Our view As expected, the Q1 update confirms a weak volume performance, not helped by a strong comparative in Merchanting which does ease as the year progresses. Price inflation is slowing but remains significant and a good offset to the volume fall in Q1. Toolstation saw better LFL growth, helped by an easier comparative. While price inflation is expected to slow as the year progresses, the comparative also eases in Merchanting, and with support from cost savings management expects to deliver a full year performance in line with market expectations. Consensus for FY23 is unlikely to change materially today, as it factors in a c.1% revenue fall and a significant fall in profits. The share price is down significantly from the recent high. Update summary The trading update confirms a challenging start to the year, with weak volumes but full year expectations unchanged. Q1 Group LFL sales were down by -2.9% with price +8.7%, and volumes were therefore down by over 11%. Merchanting saw the weakest performance with sales impacted by a weak new housing and domestic RM&I market; the commercial and industrial markets were more resilient. Total Merchanting sales were down by -4.7% in Q1, with LFL sales down by 4.2% and with price inflation of +9%. Toolstation delivered a good performance in Q1 with sales up by +8.6% and LFL sales growth of +4.6%, including price inflation of +7.6%. The business has begun the commission of the new distribution centre in UK, which is on track to be completed by Q3 2023. Toolstation Europe enjoyed sales growth of +14% in Q1. As anticipated, trading conditions were challenging in Q1 and management continue to expect to deliver a full year performance in line with market expectations. Valuation The shares are up by only +7% YTD and reside on FY23E PE and EV:Sales multiples of 11.5 times and 0.56 times respectively.
Our view. The group reports on Q1 trading on 25th April. We expect the Group to have enjoyed strong price inflation in Q1, but volumes are expected to be significantly weaker, due to weaker new housing and because the comparative for Merchanting only starts to ease later this year. Good price inflation during the first part of this year combined with cost savings and an easing comparative as the year progresses should continue to support the Group’s full year profit guidance provided at the time of its full year results in late February. The shares have recently pulled back from their February high and, while near term trading will continue to be a focus, we see the medium-term outlook and strategic delivery as being the more relevant issue for the share price and medium-term valuation potential. Looking out to the medium-term, we continue to see the Group as being well placed to benefit from positive cyclical and structural drivers. Recent data points and Q1 expectations. Recent UK construction data show a good bounce back in February, with RM&I work relatively strong and materials price inflation continuing to run at high rates. However, the recent PMI reading suggests March trading slowed from a strong February. Overall, we expect strong high single-digit percentage price inflation but weak volumes in Q1, with new housing activity particularly weak. We expect a Q1 performance broadly consistent the Group’s full year profit guidance. We expect Group LFL sales to be down by c.1% in Q1 with Toolstation up by c.5% and Merchanting down by c.2%. We tweak our FY23E underlying profit (inc. property profit) to c.£271m. Valuation. Shares have lagged the sector average YTD, up by only 7%. They reside on a FY23E PE multiple of c.11.5x, but the real value in the shares is looking out to the medium term with the expected benefit from a more mature Toolstation and with Merchanting performing well.
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
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.
Our view. While trading looks challenging and the group has significant exposure to a weak UK residential market, much bad news is now factored in to estimates. Over the medium term, as it delivers on its strategy, the group offers attractive value in our view. Merchanting seems to be in a better place, taking share with an offering more aligned to its customers. Toolstation remains frustrating in terms of the visibility of the profit trajectory, especially Europe, but management clearly believes in the model and continues to invest to support good growth and profits over the medium term; Toolstation UK should see good operating leverage from here. The group is more focussed on its core businesses and, after the poor share-price performance, we upgrade to BUY with a 1,120p price target. Results summary. Results were modestly weaker than we expected on a weaker-than-expected Q4 in Merchanting. Revenue was up by 8.9% to £4,995m (LFL +6.6%) with underlying profit at £285m (-6.3%). In 2022. Toolstation was the disappointing part of the business, with an operating loss of c.£9m, but Merchanting performed relatively well in a challenging market. Net debt was £819m, implying leverage of c.1.8times. Interim DPS was 39p. Outlook and estimates. Management is planning for mid to high single-digit market volume declines with price inflation at the same rate in 2023. After overhead inflation of +5-7% and £25m of cost savings, it expects to meet current market consensus. We adjust our FY23E underlying profit forecast (ex. property profit) to c.£254m, which is a c.10% fall year on year. Valuation. Shares reside on a FY23E PE multiple of 11.8x, but the real value in the shares is looking out to the medium term with the expected benefit from a more mature Toolstation and with Merchanting performing well.
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.
Our view Results are a c.3% miss at the operating profit level on weaker than expected Q4 trading in Merchanting. While Q4 was weaker than expected, overall Merchanting took market share and delivered a relatively good outcome for the full year. Toolstation was loss-making, as expected. The Group is proactively taking out costs as it expects significantly weaker volumes in 2023. With price inflation offsetting the expected fall in volume and c.£25m of cost savings, it expects 2023 profits to be in line with market expectations. Cleary the expected weak markets has been reflected in the share price for a while and although the shares are up strongly YTD, valuation sits at a discount relative to peers. 2022 results summary The 2022 results are a c.3% miss at the underlying operating profit level. It seems that Merchanting was weaker than we expected in Q4. Adjusted Group operating profit of £285m, excluding property and a £15m restructuring charge, compared to a consensus estimate of c.£294m. Group revenue was up by 8.9% to c.£4,995m, with LFL growth of 6.6%. Divisionally, Merchanting, despite delivering well for the full year and taking share, saw slightly weaker than expected trading in Q4; Merchanting adjusted profit of £329m (with an operating margin of 7.8%) was c.£10m lower than we expected. Toolstation delivered an operating loss of £9m (UK profit of £21m) as expected, driven by the c.£30m loss in Europe. Adjusted EPS fell by 12% to 94.6p and the DPS of 39p was 1p better than expected. Covenant net debt was a bit better than expected, with leverage (IFRS16) of 1.8 times in line. Outlook comments point to a mid-to-high single digit percentage decline in volumes in 2023, but with mid-to-high single digit price inflation. Supported by cost savings of c.£25m from restructuring including closing c.20 branches, the Group expects to deliver 2023 profits in line with current market expectations. Capex is being cut for 2023. Valuation Shares are up by c.18% YTD and reside on a FY23E PE of c.11.5 times and an EV Sales multiple of c.0.60 times.
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.
Our view Q3 trading was relatively resilient in terms of total sales (+10.7%), boosted by strong pricing, but full year 2022 consensus operating profit looks likely to edge lower by c.2-3% against a weakening volume backdrop. While volumes are weaker, pricing has been better and seems to have been successfully passed on. The market’s focus is on next year, and the weaker volume backdrop, particularly against an easier comparative in Q3, is not an encouraging trend into 2023 even with pricing looking likely to remain at elevated levels next year. Q3 trading update summary Today’s Q3 trading update points to a weakening volume backdrop, but stronger pricing. Total Group sales in Q3 were up by 10.7% (volume down by 5.6% and pricing up by 16.3%) with LFL sales up by 7.4%. Merchanting saw total sales growth of 11.5% (volumes down by 6% and pricing +17.5%) with LFL growth of 8.7% (which implies an estimated LFL volume fall of .c9%) with trading consistent throughout the period. Smaller RM&I project demand was weaker, with the larger projects and Specialist Merchanting trading better. Toolstation saw total sales growth of 6.1% (volume down by 3.4% and pricing up 9.5%), with LFL growth of 0.2% (implying LFL volumes down by c.9%). The Group continues to invest in Toolstation with 80 new branches expected in 2022. Outlook comments point to a challenging market backdrop with elevated levels of cost inflation and the Group expects to deliver full year operating profit “around the middle” of the current consensus range. Clearly the volume backdrop has weakened in Q3, and this is against an easier comparative than Q2. Valuation The shares are down by c.50% YTD and reside on FY23E PE and EV:Sales multiples of c.9 times and 0.5 times respectively.
Our view. While the group continues to invest in Toolstation, its performance this year is disappointing, and we expect it to be only break-even in FY23E. Merchanting is delivering relatively well, as expected. We cut our profit estimates and, while recognise the medium-term potential value in the shares, we retain our HOLD rating with a lower price target of 1,030p. Results summary. Results were weaker than we expected with revenue up by 10.3% to £2,535m (LFL +7.9%) and underlying operating profit a smidgen below H1 2021 at £163m. Toolstation was the disappointing part of the business with an operating loss of £8m as the DIY normalisation was greater than expected, as were losses in Europe. Merchanting performed relatively well and as expected, with LFL sales growth of 11.7% (pricing +15.3% and volume -2%) and operating profit up by 9% on the prior year, but with operating margins slipping to 7.9% from 8.2%. Net debt was £900m implying leverage of c.1.75 times. Interim DPS was 4.2% higher at 12.5p. Outlook and estimates. Management expected full year operating profit to be “broadly in line” with market expectations. We now expect underlying profit in Merchanting to see c.8% growth for the full year as it enjoys strong price inflation in H2, despite LFL volumes falling by c.3%. Toolstation is harder to call, but with the normalisation of the DIY market likely to continue and a £30m loss in Europe, we expect it to break even in H2 with a c.£8m loss for FY22E. We cut our underlying profit forecast (including property profit) to c.£328m which is a c.7% fall year on year. We then expect flat profits for FY23E. Valuation. The shares reside on an undemanding FY23E PE multiple of c.10x and an EV:Sales multiple of c.0.55x. While this looks unstretched relative to the medium-term potential value, it is not too out of kilter relative to peers.
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.
Our view First half results were a bit weaker than we expected, on a softer performance in Toolstation. Merchanting delivered well with Trade holding up and taking share and price inflation of +15%, boosting profits against a strong comparator. Toolstation was much weaker than we expected, with a H1 loss of £8m and volumes being hit by a falloff in DIY business. For the full year we would expect consensus FY22 profit to reduce by c.3-5%, as a larger loss from Toolstation Europe (£10m) is factored in and a weaker Toolstation expectation is broadly offset by a strong Merchanting performance. Interim results summary Group H1 revenue increased by 10.3% to £2,535m (LFL +7.9%) with adj. operating profit of £163m (-0.6%) around 4% below our forecast. The property profit of £21m (£17m in H1 2021) was higher than we expected. Merchanting performed relatively well, with LFL sales growth of 11.7% (pricing +15.3% and volume -2%) and an adjusted operating profit margin of 7.9% (H1 2021: 8.2%) and an operating profit +9% up on the prior year. Toolstation was weaker than expected with LFL sales down by 10.6% (volume down by 13.9% and price +9.3%) as retail/DIY normalised despite the Trade end markets holding up; there was also a bigger loss in Europe. Toolstation revenue was down by 4.6% and made an overall loss of £8m in H1. Interim DPS increased from 12.0p to 12.5p. Leverage was 1.75 times (post IFRS16). Outlook comments point to a financial performance for the full year being “broadly in line”, with expectations of a continuing good performance in Merchanting offsetting a weaker than expected performance in Toolstation, with a c.£10m higher loss in Toolstation Europe. Valuation The shares are down by 32% YTD. They trade on modest FY22E PE and EBITDA multiples of c.9 times and c.6 times respectively. They reside on an EV:Sales Multiple of c.0.62 times with forecast operating margins of 6.7% for FY22E.
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
Our view The Group has started the year well with price inflation boosting revenue. Merchanting is seeing decent volume growth and strong price inflation being passed on in the market. Growth rates in Toolstation were impacted by the exceptionally strong comparative, but the business is doing well and expected to normalise in terms of growth rates in H2 2022. Overall, we would not expect full year profit consensus to change materially on the back of this update. However, if volumes hold up into H2 2022 with price inflation continuing to be strong, there is upside risk to estimates; clearly visibility and risk around volumes into H2 2022 is the key concern, especially as weaker end markets may make it more difficult to pass on price increases. Q1 update summary Today’s trading update confirms a positive start to the year with total sales up by 13.6% on the prior year. Merchanting saw total sales up by 17.9% in line with expectations, with pricing accounting for around two-thirds of the growth and volumes therefore up by c.5-6%. Cost inflation continues to be passed through, with customer demand remaining strong across all the group’s end markets. Toolstation sales were down by 6% as anticipated, with LFL sales down by 11.9%, reflecting the tough comparative of Q1 2021 (+42%). Group stock levels remain healthy. Pricing is now likely to be strong throughout the whole year, rather than ease off in H2 2022 as previously expected. Management confirm their expectations remain unchanged, but they are clearly mindful of the macro headwinds. Valuation The shares are down by 18% YTD and flat over the last month. They reside on FY22E PE and EV/Sales multiples of c.11 times and c.0.7 times respectively, with an expected operating margin of 6.7%. Dividend yield is 3.4%.
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.
Our view. The Group delivered a strong set of FY21 results which benefited from strong trading conditions for both volumes and pricing. The Group also completed substantial structural change to the business last year with it being simplified to focus on trade businesses. The balance sheet is dramatically improved and it looks better positioned to focus on its key businesses to deliver better operational and financial performance. We tweak our FY22E estimates up and expect good trading conditions with ongoing strong price inflation to boost profits in FY22E. We retain our HOLD rating. Results summary. A solid set of results reflected healthy trading conditions and the strategic repositioning of the Group in FY21 with the demerger of Wickes and sale of Plumbing and Heating. Results were modestly ahead of consensus, albeit largely due to higher than expected property profits, and the balance sheet was improved. The share buyback was increased by £70m to £240m. Outlook and estimates. The Group has enjoyed a positive start to the year with trading conditions remaining encouraging. Price inflation in Merchanting is expected to be strong, with low double digit percentages likely for H1, and the RM&I and new housing market is looking resilient, with other areas such as local authority spending, commercial and infrastructure also seeing recovery. The outlook for Toolstation remains positive as the branch roll out continues. We expect profits to be up on FY21, with underlying profits, excluding property, up by c.8.5% at £329m. Valuation. The shares are down by c.10% YTD. They reside on a relatively undemanding FY22E PE multiple of c.12 times falling to c.11.6 times in FY23E. Dividend yield is c.3%.
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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Our view A good set of results reflect good trading conditions and the strategic repositioning of the Group in FY21 with the demerger of Wickes and sale of Plumbing and Heating. The balance sheet is hugely improved as a result. Results are modestly ahead of consensus, albeit largely due to higher than expected property profits. The share buyback has been increased to £240m. Recent trading and outlook comments read reassuringly with more progress to be made in FY22. FY22 consensus looks likely to edge up by 2-3% and with property profit expected to be only £25m in FY22, the underlying profit increase expected for FY22 looks decent. Management seems confident of the volume outlook and strong price inflation for the foreseeable future. FY21 results summary Good set of FY21 results. Adjusted operating profit of £353m looks around 3-4% higher than consensus, albeit with the help of higher property profit of £49m, versus the c.£40m expected. The year enjoyed strong LFL revenue growth of 25.4% in FY21 and 14.4% ahead of FY19, with Merchanting and Toolstation both performing well in a strong market. The adjusted continuing operating profit margin was up by 60bps versus FY19 with Merchanting seeing a 40bps boost from inflation and stock gains. Covenant net debt of c.£87m was broadly as expected with IFRS16 leverage comfortable at 1.2 times. A total ordinary DPS of 38p was higher than the 33p we expected and the Group has returned the net proceeds from the P&H disposal through an already paid 35p special DPS and the ongoing share buyback of £170m which has been increased to £240m today. Outlook comments read reassuringly with a positive start to the year and further progress expected to be made in FY22. Management are confident volumes will be good with new housing and RM&I remaining strong and price inflation supportive. Valuation Shares are down by c.9% YTD and essentially flat on a year ago. They reside on a FY22E PE of c.13.7 times and an EV Sales multiple of c.0.72 times. They offer a dividend yield of c.3.0%.
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
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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.
Today's news & views, plus announcements from HLMA, BWY, DPLM, TPK, PDG, KWS, KETL, TAVI, TPFG
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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Liberum's research coverage encompasses more than 340 stocks across 12 pillars. Each quarter we ask our sector teams to list their most and least preferred stocks on a six to 12-month time horizon.
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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Liberum's research coverage encompasses more than 340 stocks across 10 pillars. Each quarter we ask our sector teams to list their most and least preferred stocks on a six to 12-month time horizon.
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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.
Our annual strategy review takes a look at what investment strategies worked and what didn’t last year. We offer index and sector valuations as of year-end.
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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.
