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Headlam Group plc

Zeus Capital Q&A with Andy Hanson: Headlam Group plc (LON:HEAD)

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


Q1: Now Headlam Group announced a trading statement this morning, Andy what did it say?

A1: We’ve got a trading statement for the 10 months of the year to the end of October, obviously 2 months additional trading beyond that but the 10 month trading statement was very strong. The company had a strong first half of the year and it was up to the 4.8% at the interim stage and they’re saying at the end of October trading was up 5.2% so a good performance with the second half improving.


Q2: Now we’ve heard from other retail-focussed businesses that trading’s been difficult post the referendum, has this impacted Headlam?

A2: Well interesting, like I said, at the interim stage the business was tracking ahead of expectation slightly but I kept my forecast where they were with the expectations that the market would slow a degree. Certainly other businesses at the time were suggesting that there would be a slowdown and what we’ve heard from the likes of Topps Tiles Plc (LON:TPT) they have been impacted by consumer slowdown but Headlam haven’t really been impacted which is slightly surprising but it also really really good performance.


Q3: You’ve upgraded your numbers this morning, what’s driven this?

A3: Well effectively 2 things have driven this, as I said I had expected a bit of a slowdown in the second half but this hasn’t come through that the volumes have stayed as expected has been beneficial. This has been helped by price increases that the business put though in July/August time, these were put in to offset the cost price increases the business was seeing particularly related to currency as 60% of effectively their cost what they buy is bought on the continent so the weakness if sterling has increased this. So they put through this 6% increase then the net effect has been at 3.5% price increase. So the good volumes combined with this price increase has driven top line growth above what we had been expecting so I’ve actually upgraded my full year ’16 numbers of that 2% on the top line and about 4% at the profit line and just rolled that through to my /17/18 numbers so you get the 2% top line and the 4% upgrade to profitability across the forecast period.


Q4: So what your thoughts on FY17?

A4: The outlook is still slightly mixed, the UK consumer will be important for Headlam next year and GDP growth forecast looking set to slow there is still headwind for the business and cost pressures still to come through. The one thing I would say about Headlam is that it has great pricing power because the average spend on a carpet is fairly small, say £200, a 5% price increase doesn’t have that much impact. So I would expect them to offset the cost pressures that they have done in FY16 and FY17, the unknown at the moment is the impact on the consumer offsetting any top line weakness from the UK consumer the business does have some operational levers it can pull which should improve margins slightly. So whilst I’m aware that FY17 could prove difficult my forecasts are conservative, I’m only assuming 1% top line growth and 5% in ’16, 8% in ’15?? So I’m still quite confident that the business will make the step forward in terms of profitability in FY17.


Q5: In FY15, Headlam paid a special dividend, was this a one-off or should we expect further returns of capital?

A5: We should certainly expect more special dividends going forward, management have been quite clear that they will return capital to investors. The basic current yield at the moment stands at 4.5%, you’re going to get a decent yield but that’s likely to be topped up by these special dividends. The one thing I would say is they’ve quite a big capex investment in FY17 which relates to a distribution centre in Ipswich so maybe not in ’17 but certainly in ’18 I would hope to get further special dividend.

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