Overtly cautious comments from Travis Perkins (TPK) cause shares in the builders’ merchant to fall 7.5% to £14.48. The company is worried that rising inflation could impact house sales in the second half of 2017 and potentially damage consumer confidence.
A less confident consumer may then result in fewer big ticket purchases like kitchens and bathrooms which make up around 10% of Travis Perkins’ sales.
The warning coincides with full year results which show no growth in pre-tax profit and minimal gains in revenue. The group has suffered a bad patch from its plumbing and heating division, causing it to incur a £235m impairment charge in the accounts against goodwill and tangible and intangible assets.
It also suffers a £57m exceptional charge to cover the closure of underperforming branches, supply chain rationalisation and central restructuring.
ISN'T TOUGH TRADING OLD NEWS?
The trading issues won’t surprise the market as they’ve been long flagged by Travis Perkins, hence why earnings expectations were fairly low for the reported period. It’s the outlook concern that really troubles investors. Even analysts are taken aback by the comments.
Investment bank Liberum believes consensus earnings forecast are more likely to be nudged down on the full year results statement than up.
Travis Perkins isn’t just worried about kitchen and bathroom sales. It also flags concerns about its ‘contracts’ businesses which are particularly sensitive to the rate of new commercial, industrial and infrastructure construction.
The affected businesses include its BSS plumbing operation and CCF which distributors building products such as ceilings, flooring and insulation.
‘Uncertainty in this sector is both to the upside and downside and no clear pattern has yet emerged as to which projects might be accelerated or deferred or the extent to which the Government will support infrastructure investment,’ says the company.
TIME TO BUY THE SHARES?
Stockbroker Davy says Travis Perkins’ results are in line with market expectations but there’s too much negativity to warrant turning buyers of the stock.
‘Looking out to 2017, top-line growth will be more difficult to come by - the group suggests volumes could fall in 2017 - while the recent weakness in sterling continues to present inflationary pressures,’ it says. ‘As such, it is too early to turn positive on the stock in our view. We reiterate our “Underperform” rating.
POSITIVE CASH FLOW SIGNAL
Contrarian investors might take comfort in the company’s ability to generate strong levels of cash flow in a difficult market.
Cash flow is a very important indicator as to the true health of a business, so you could take a longer term view and suggest that price weakness in Travis Perkins is a buying opportunity.
The excellent levels of cash generation helped net debt close the year at £378m (2015: £447m) which was much better than the £447m forecast by Liberum.
