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Headlam Group plc

Headlam Group plc Positive trading momentum

In the trading update released this morning, Headlam Group plc (LON:HEAD) has reported an encouraging 4.0% growth in revenues for the first six months of the year. This result reflects a positive performance across the UK and Continental Europe and implies a notable acceleration in sales in the final month of H1. Residential demand remains robust in both regions. In its commercial division, UK sales declined in May and June, impacted by increased political uncertainty, whilst in Europe, the declining trend seen in the first four months of the year improved, despite continued underperformance in the Swiss business. Group gross margin increased by an impressive 103 basis points YOY thanks to effective organisation and streamlining of business processes. Trading for the full year remains in line with management expectations and we make no changes to our forecasts today. At current levels Headlam trades on a PER of 13.5x with an attractive 4.4% dividend yield before considering the potential for further special dividends.

Positive momentum – Today’s update implies an acceleration in sales in the final two months of H1, with revenue growth of 4.0% to £341.9m ahead of the 2.2% growth reported for the four months to 30 April; a solid result given the strong prior year comparative (H116 +4.8%). Like for like sales increased across both the UK (85.9% of Group revenue) and Continental Europe (14.1% of Group revenue), up 2.1% and 3.0% respectively.

Growth across both regions – In the UK, LFL residential sales were up +2.8% YOY, building on the 2.0% growth reported at the AGM in May. This is a particularly encouraging performance given the weakness reported by sector peers of late. In the UK, commercial sales for the first six months grew 0.5% on a LFL basis, moderating slightly on the 1.6% growth reported in the first four months as heighted political uncertainty impacted business sentiment. This trend was reflected in Continental Europe where LFL commercial sales declined 0.5% held back by underperformance in the Swiss business, although this rate of decline implies a notable improvement on the 4 month run rate reported in May, where sales were down 3.5%. Continental European residential sales remain strong, +6.7% in LFL terms.

Margin gains – whilst much of the sector has reported sterling related headwinds since the Brexit referendum last June, Headlam has seen an impressive 103 basis point uplift in gross margin to 31.06% for the first six months of the year. This is the result of management focus on more effective organisation and operational streamlining of the business and is 50 bps ahead of our expectations for the full year.

Forecasts – Whilst acknowledging the promising performance reported by Headlam Group plc today we leave our full year forecasts unchanged, mindful of key trading periods over the summer and in December that are yet to come. Today’s statement gives us increasing comfort over our full year forecasts, with the potential for upgrades going forward.

Valuation – An FY17 PER of 13.5x reflects the ongoing potential for growth and margin expansion, as evidenced in today’s statement. An attractive dividend yield of 4.4% is supported by potential for further special dividends with management committed to returning surplus cash to shareholders.

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