Headlam Group plc (LON:HEAD) in its AGM statement released this morning, confirms that trading in the first four months of the year has started well and is in line with expectations for FY17. This builds on a good performance in FY16, which saw forecasts upgraded twice due to strong trading in the second half of the year. In the UK year to date, both residential and commercial sales were higher, despite challenging comparatives. Solid growth in Europe was driven by residential demand whilst the commercial sector was softer, held back by underperformance in the Swiss business. Headlam continues to act as a consolidator in its highly fragmented industry, announcing the acquisition of Scottish based McMillan Flooring Distributors. Our forecasts remain unchanged today but we are encouraged by the positive start made to FY17 trading. At current levels and following strong share price appreciation since December, Headlam trades on a PER of 15.6x with an attractive 3.7% dividend yield, before considering any further special dividends in FY17.
* Current trading – Consecutive upgrades in H216 implied a solid start to the current year. Revenue growth of 2.2% to £221.2m in the four months to 30 April 2017 is positive against a strong prior year comparative (+4.5% in first 4 months FY16) with growth across both the UK and Continental Europe. On a like for like basis, the UK grew 1.9%, against the 0.2% and 2.1% reported in January and February. Both residential (+2.0% LFL) and commercial (+1.6% LFL) end markets saw experienced good growth. In Europe, which accounts for c.14.0% of sales, LFL growth of 3.0% was driven by a strong performance in residential sales (+9.3%), offset by a softer commercial sector (-3.5%) with much of this decline attributed to an underperformance in the Swiss business.
* Further acquisitive growth – today’s announcement includes the acquisition of McMillan Flooring Distributors Limited. With locations in Edinburgh and Glasgow the acquisition expands the Group’s presence in Scotland and takes the Company’s total number of businesses to 61. This follows the acquisition of Mitchell Carpets, based in Poole, Dorset. The Group’s ongoing acquisition strategy allows it to benefit from operational gearing as it leverages central costs and working capital over its enlarged distribution network. The group’s ability to increase prices without a material impact on volumes has been a key driver to the strong performance of the business over the last 12 months.
* Valuation – The positive news flow from Headlam Group plc seen in recent months has driven the share price from c.480p in December to c.635p. On a current FY17 PER of 15.6x we believe the valuation reflects the ongoing growth and potential for margin expansion, with a 7% operating margin achievable in the near term (FY16: 5.9%) aided by a c.3% price increase introduced on imported products in January. There is also scope for further special dividends with management committed to returning surplus cash to shareholders; an 8.0p special was announced in March following a 6.0p distribution announced for FY15.
