Headlam Group plc (LON:HEAD) interim results follow the recent trading update (July 18th) and confirms that the first six months of the year has been positive for Headlam. Revenue of £341.9m (HY16: £238.7m) was up 4% yoy with Gross Profit increasing 7.6% to £106.m (HY16: £98.7m) on margins 103bps higher at 31.1%. The improvement in margin reflects the on-going efficiency gains made within the business. The operational leverage from revenue growth and improved margins drives an 11.6% improvement in operating profit, as margins increase 30bps yoy, leading to a similar increase in PBT. The interim dividend increases 12.7%, in line with the increase in earnings, to 7.6p. We leave FY forecasts unchanged for now except for a minor increase in EPS on a lower tax charge. The performance in H117 shows Headlam’s continued outperformance against the majority of UK RMI, building product focused businesses. That it has been able to grow both volume and price over the last 18 months is testament to Headlam’s market position and low average value per transaction resulting in good pricing power. In addition, efficiencies offer the potential for continued operational gearing. At last night’s close the shares trade on 13.9x earnings and yield 4.2% with the potential for further special dividends.
Current trading and the outlook for H2 remains strong – Trading post the period end has remained solid. The summer period is important for the Commercial division which sees it busiest time of year due to refurbishment in the educational sector. This, and the traditional importance of the final few weeks of the year for the residential division, means Headlam’s performance is H2 weighted with c. 60% of profitability derived in the second half of the year. As a result, and despite the better than expected performance in H1, we leave forecasts unchanged. Should the business see an improvement in trading during H2 it would lead to upgrades as we saw post the ten-month trading update in FY16. However, we would caveat that further price increases will be introduced in September to offset cost pressures. Failure of these to stick would adversely affect the FY outcome.
Structural growth in margin will continue – Operating margins have steadily increased from the sub 5% in FY13 to the 5.9% reported in FY16. Better trading has helped but management’s focus on streamlining the business and driving efficiencies from the distribution network has been the major driver of the improvement. Whilst more difficult should the market deteriorate, Headlam will continue to be able to improve underlying margins to over 7%.
Valuation – A FY17 PER of 13.9x is in line with the wider sector average and reflects the ongoing potential for growth and margin expansion, as evidenced in today’s statement. A solid outcome in the important second half should see FY17 expectations at least met. In addition, Headlam offers an attractive dividend yield of 4.2% and has the potential for further special dividends, as seen in FY16, with management committed to returning surplus cash to shareholders.
