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Headlam Group: Looking to floor competitors in a challenging landscape

Publication Date: 13 Jul 2018 - By Gaurav Sharma (Editor ReachX) By Gaurav Sharma (Editor ReachX)
Actionable
Differentiated

Equity Fundamental Equity UK EU ex-UK Consumer Materials

From a challenging fiscal year to flat markets, strategic acquisitions to gross margin improvements, of late, London-listed Headlam Group (LON: HEAD) has seen it all. The British company – touted as Europe's largest distributor of floor coverings – specialises in carpet, residential vinyl, wood, laminate, luxury vinyl tile, and commercial flooring, and is an attractive stock. 

While Headlam’s business is pan-European, its key markets are France, Switzerland, UK and the Netherlands, where the company has made a name for itself, as a key supplier of parquet, linoleum and other flooring materials to a loyal customer base of independent retailers and professional customers. 

On paper, the working parameters and fundamentals of the group remain solid, but being a consumer cyclical manufacturer of furnishings and fixtures brings broader challenges. A flat market in 2017 ensured a lacklustre second half of the fiscal year for Headlam. 

For the 12 months to December 2017, the group's total revenue increased 2.0% an annualised basis from £693.6m to £707.8m. Underlying pre-tax profit increased by 7.5% on an annualised basis to £43.1m

The full-year financials evoked mixed feelings from market observers. Some ReachX experts commended the uptick despite weaker trading conditions for the majority of the second half of Headlam’s trading year, while others said it flagged a disappointing performance. 

The mixed verdict has given Headlam's share price a 52-week range of 408.50p to 635p. In the year till date, the share price is down from 568p, noted at the start of the current trading year (2 January) to 463.50p on 11 July; a drop of 20.55%. 

However, Headlam has attempted to grab investors’ attention via eye-catching announcements, given its market tussle with competitors Victoria, Wincanton and Ceva Group, in a sector that isn’t quite firing up.

For starters, the company unveiled a gross margin improvement of 50 basis points to 31.1%, up from 30.6% posted in its previous fiscal year, achieved "through a concerted focus on margin enhancement initiatives."

It also raised its total ordinary dividend in respect of 2017 by 10.0% to 24.80p to keep those money managers eyeing income stocks onside. 

Padding it all up was its acquisition of Surrey, UK-based tile supplier Domus group, which has provided products for several British landmark projects including Battersea Power Station, Wembley Stadium and London's Heathrow Airport. 

In 2016, Domus completed in excess of 3,500 projects and turned over £29.6m and reported a pre-tax profit of £2.9m. 

Headlam offered an initial cash consideration of £29.4m for Domus, plus a deferred consideration of £3.3m payable in cash and ordinary shares of 5p each, which will be distributed in December 2019 and December 2020.

An additional maximum of £2.7m could also be paid subject to Domus achieving its EBITDA targets in the three years to 31 December 2020. The addition of Domus "significantly increases" Headlam's presence in the commercial specification market, according to its Chief Executive Steve Wilson.

"Domus broadens our overall position in the industry. Its provides us with meaningful product, supplier and customer diversification and expansion into a market segment that offers higher levels of profitability and additional growth opportunities."

In his overall assessment of what the future holds for the company, Wilson believes Headlam deserves credit for having exhibited further growth “against what was qualitatively viewed as an overall flat market, robustness in the face of a weaker second half of the year, and improved profitability as a consequence of our focus on efficiency initiatives.”

The company says it is committed to finding growth opportunities and broadening its overall leading position in the industry while continuing to invest in the business to support organic growth. However, the market will need further convincing. Headlam's interim results would provide an indication of this. 

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav Sharma Editor ReachX

 

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