European floor coverings distributor Headlam (HEAD) is out of favour on Wednesday after warning full year profits will be ‘towards the lower end of current market expectations’. This is due to ongoing softness in the UK market.
Shares in the Birmingham-headquartered furnishings firm have been drifting of late with investors skittish about a weak retail market. Having previously flagged tough market conditions today’s damage is limited, Headlam’s shares trading 3.2% lower at 435p on the news.
Unveiling results for the six months ended 30 June, CEO Steve Wilson reports further growth and an increase in Headlam’s market position during the first six months of 2018. Yet Wilson comments:
‘However, given the current softness in the UK floorcovering market and the associated trading impact on the company’s UK businesses coupled with the current indications that these conditions are likely to continue during the second half of the year, the board now expects that the full year outcome, whilst ahead of the full year 2017, will be towards the lower end of current market expectations.’
During the half, UK like-for-like sales slumped 5.2%, having grown 2.1% a year earlier, while like-for-like revenue growth in Continental Europe slowed from 3% to 1.7%. This constrained top line growth for Europe’s biggest floorcoverings distributor, up 1% to £337.5m, with underlying profit before tax up a meagre 0.9% to £17.73m.
COPING WITH A SOFT CORE
In the core UK business - speaking for 85% of revenue - market softness persists and Headlam warns ‘this situation will likely remain through the second half of the financial year with the attendant impact on the core residential business’.
Yet it is anything but all doom and gloom for Headlam, which has grown rapidly via organic growth and acquisition since 1992 and supplies residential and commercial sector customers with everything from carpets and laminates to underlay and commercial flooring. Encouragingly, order intake in the important month of August is in line with management expectations, the commercial business enjoying the traditional uplift due to education sector refurbishments.
Headlam’s half year gross margins are 113 basis points higher too, boosted by acquisitions and efficiency initiatives, while the dividend is maintained at 7.55p. The company also plans to push through average price increases of 3% from next month to mitigate the impact of supplier increases due to raw material cost inflation.
THE ANALYSTS’ TAKE
Investec Securities lowers its target price from 660p to 560p and downgrades its earnings per share estimates for 2018, 2019 and 2020, although the brokerage actually reiterates its ‘buy’ rating on Headlam, which crucially, remains a profitable growth and progressive dividends story.
For calendar year 2018, Investec forecasts a modest increase in normalised profit before tax (PBT) from £43.1m to £43.4m, ahead of £44.9m and 46.4m in 2019 and 2020 respectively, with the dividend expected to rise from 24.8p to 24.9p.
Panmure Gordon is sticking with its positive stance and 700p target price. ‘Whilst trading remains soft, the significant improvement in the gross margin points to early efficiency gains being achieved’, says the broker, arguing that ‘as further gains are achieved, the operational performance of the business will accelerate.’
Panmure also stresses ‘Europe represents a material growth opportunity for the group. Whilst the operation is currently small (15% of group sales), we believe the market is ripe for consolidation. Therefore, it is important to see positive top-line trends on the Continent.'
