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.