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Headlam Group – a recovery buy?

By Tom Winnifrith & Steve Moore | Saturday 17 July 2021

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

A trading update earlier this month from Headlam Group (HEAD) included “total revenue for the year-to-date is now in-line with the 2019 comparator, having been slightly below for the four months to 30 April 2021” and “the company’s Operational Improvement Programme delivering revenue growth opportunities and cost improvements”. This combination suggests there is further recovery value in the shares.

The group is Europe’s leading floorcoverings distributor, working with suppliers across the globe and with principal customers being independent retailers and smaller flooring contractors alongside other groups such as larger retailers, housebuilders, specifiers, and local authorities. It operates 66 businesses across the UK, France and the Netherlands, supported by the group’s network and centralised resources. Chief Executive Steve Wilson is a Fellow of the Institute of Chartered Accountants in England and Wales and joined the group in 1991 as Finance Director, being appointed to his current role in 2016. In 2020 remuneration totalled £0.51 million with 665,146 shares owned. CFO Chris Payne is a qualified Chartered Accountant who joined to the role in 2017, having previously been Commercial Finance Director at waste management company Biffa plc. In 2020 remuneration totalled £0.43 million with nil shares owned. Chairman Philip Lawrence has experience including from the Coal Authority, Marconi plc and Deloitte. He was appointed as a Non-Executive Director here in 2015 and became Chairman in 2018. In 2020 remuneration totalled £0.14 million with 11,184 shares owned.

The noted revenue “in-line with the 2019 comparator” excludes contribution from Swiss business which was sold in May, realising approx. £12 million. The revenue is added to be “approximately 46% ahead of the 2020 comparable period… the residential sector has continued to be strong, and the commercial sector is continuing to recoup its earlier weakness”. For 2019, the company reported revenue of £719.2 million, generating underlying pre-tax profit of £39.5 million and earnings per share of 38.8p. Its 2020 results showed net cash of £51.6 million (+£24.6 million on the prior year), total current assets of £280.9 million (-£8.6 million) and total liabilities of £247.4 million (£4.7 million lower). ‘Non-current’ property, plant and equipment was £8.3 million higher at £122.9 million and a dividend was resumed at 2p per share, with a return to dividend payments based on earnings anticipated this year (25p per share was previously proposed for 2019).

There are clear demand and supply risks, particularly in the current environment and as shown by 2020 – including how long will the residential sector continue to be strong? However, there is clear recovery upside in the commercial sector and a robust balance sheet. In terms of Headlam’s competitive offering, it argues “alongside long-established processing and distribution expertise, suppliers benefit from Headlam’s marketing and customer servicing into the most extensive customer base”.

There are consensus forecasts for an underlying pre-tax profit of £29 million on revenue of £653.5 million this year, rising to £33.7 million on £674.6 million next. The market cap is currently approx. £421 million. However, we see clear potential for outperformance of those forecasts based on the current trading momentum and the operational improvement programme being implemented. The shares have previously traded comfortably above 600p – and that level would still be a 4.2% dividend yield based on a 25p per share payout again. Ahead of a 29th July-scheduled further update on trading, at a 495p offer price and up to 500p targeting 600p+ again, the shares are a recovery buy.

This article first appeared on the N50 website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of the next share tip from Tom & Steve and a new shorting piece this week click HERE

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