For Headlam Group plc (LON:HEAD) FY16 has been a good year with results in line with forecasts that were upgraded at the time of pre-close trading statement (19th January) which followed the positive revision to estimates post the ten-month trading update (1st December 2016). The performance during the year has been good with growth in both revenue and margin. Revenue in FY16 of £693.6m (FY15: £654.1m) showed 6% yoy growth. This was magnified at the operating level due to the August price increase in the UK, leading to an increase margins during the year of 30bps. The combination of revenue growth and operational gearing lead to c. 15% profit growth yoy. In addition, Headlam has announced its intention to pay a special dividend of 8.0p. This follows the 6.0p special paid in FY15 and is on top of the 9.0% growth in the total dividend for the year. On the total pay-out for FY16 of 30.6p the yield at last night’s close is c. 5.0%. We leave FY17 and FY18 forecasts unchanged post the recent upgrades. On current forecasts and, post the strong run following the December statement, Headlam trades on less than 15x earnings and yields 3.9%, prior to any further special dividends in FY17.
The company has outperformed the market and the majority of its peer group during FY16 – Industry forecasts assumed the market would grow 3.6% in 2016 against the 4.7% UK like for like performance delivered by Headlam. Whilst other RMI related businesses struggled during 2016, Headlam could generate both volume growth and increase prices to offset cost input pressures. This reflects the strength of its business model and its significant market share of the UK flooring market.
Current trading encouraging for FY17 – The strong performance in H216 lead to two upgrades and trading in the first two months of FY17 has continued to be strong. In the UK like for like revenue has increased 0.2% and 2.1% in the first two months of the year respectively. This is against the previous year performance of 9.2% and 3.3%. The continental European business has also been strong. Whilst too early in the year to extrapolate performance into FY forecasts we remain encouraged by recent trading and reassured by the operational performance in FY16. With operating margins moving in the right direction, we see 7% as attainable in the medium term, any slowdown in top line could be offset by further improvements in margin
Special dividends becoming a regular thing? – Headlam Group plc paid a 6.0p special dividend in FY15 and has followed this up with today’s announcement of 8.0p for FY16. Management has stated its intention to return cash to shareholders but we had expected no further announcements until after the investment in the new Ipswich distribution centre. As result, today’s announcement came as a surprise but maintain that a further special in FY17 is not currently envisaged considering the c. £17m capex in the year.
Valuation – The share price has appreciated from c. 480p since December to c. 600p reflecting the two upgrades in that time. The current FY17 PER of 14.8x does not overvalue a business that continues to outperform on both revenue and margin.
