# Headlam Group plc Q&A with Zeus Capital’s Equity Research Director Andy Hanson (LON:HEAD)

- Link: https://www.directorstalkinterviews.com/headlam-group-plc-qa-zeus-capitals-equity-research-director-andy-hanson-lonhead/412725292
- Published: 2017-03-10T12:33:25+00:00
- Author: Amilia Stone

**Zeus Capital** Equity Research Director Andy Hanson caught up with DirectorsTalk
for an exclusive interview to discuss **Headlam Group plc** (LON:HEAD)

 

**Q1: Headlam Group plc announced their final results to the year ended 31st December
2016, Andy what are they looking like?**

**A1**: Headlam have had a really good year and interesting they had a very strong
second half of the year and we actually got upgrades in early December, when they
released a 10-month trading update and in the pre-close in January so today’s results
have been well flagged. Top line revenue growth was up 6% and I think this is important
when you look at what the underlying market has done, particularly in the UK, which
was up about 3.8%, therefore Headlam Group have outperformed. Interestingly, on 
top of that top line outperformance you’ve had margin-enhancement with operating
margins increasing 30 basis points. The operational gearing within the business 
is quite an important point because management have been talking about it for some
time, to see it come through in today’s results is quite pleasing.

 

**Q2: With regards to the improvement in operational gearing, do you think it’s 
sustainable?**

**A2**: Well, historically, the business has generated margins of 10% in the UK,
I’m not suggesting that we can get back to 10% but I certainly think between 7% 
and 8% is achievable. So, looking at today’s results Headlam did 5.9%, an 8% margin
would have a material impact on profitability so yes, I do think we will benefit
from operational gearing going forward.

 

**Q3: And how is the cash generation looking?**

**A3**: The business is very cash-generative although over the last sort of 10 years
we’ve had an elongated capex plan as the business has updated distribution centres
and increased its footprint. That’s coming to an end but cash generation has been
very good.

 

**Q4: Do you think we’ll get another special dividend this year?**

**A4**: It follows on from the good cash generation, we got a 6p special dividend
last year, they’ve announced an 8p special dividend this year which takes the full
year dividend to just over 30p which equates to about 5% yield on last night’s closing
share price, I was slightly surprised that we got a special dividend this year because
of the capex that’s been going into the business. For full year ’17, the year that
we’re now in, they are planning for the £17 million capex on a new distribution 
centre in Ipswich which might limit their ability to pay a special dividend this
year, certainly, going forward, that’s the last major investment they’re going to
make in this 10-year investment programme that they’ve had. So, therefore going 
forward, full year ’18, we should, all things being equal, see another special dividend
I would imagine.

 

**Q5: So, on the whole then, how does the valuation look for Headlam Group plc?**

**A5**: The shares are performing really well since December, since we got that 
upgrade on the 10-month trading statement, they’ve gone from about £4.80 and they’re
up to sort of £6.00 now which has flowed through to the valuation. On 15 times on
a business that’s had 2 upgrades in the last 6 months and a special dividend, even
excluding the special dividend, it still yields 4%, that 15 times doesn’t look stretched.

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