James Halstead has now released their final results for the year ending 2013.
Revenues for the year were down across all reporting groups with Oceania/Asia particularly badly hit. It is worth noting that the motorcycle accessories business is no longer trading though so if this, along with the effects of foreign currency translation is discounted, revenues are only down 1.1% on last year. Thankfully costs of sales were also down but not enough to prevent a £3M reduction in gross profit. We see depreciation down by £1.2M on the total last year and a fall in admin costs is slightly mitigated by an increase in distribution costs as a result of increased warehouse space, meaning the operating profit fell by less than gross profit, down £1.5M. A reduced expected return from the pension scheme is counteracted by less interest on pension liabilities and increased interest on the cash reserves before a £1.6M reduction in tax, relating to lower rates in the UK relative to Germany and Australia, gives a profit for the year just about flat (up £68K) at £30.6M. This is the first fall in revenues for some time but not a catastrophic loss due to the beneficial make up of taxation this year.
Overall assets were up £4.3M on last year. There was a large increase in inventories due to a broader product range and product launches near the year end, a £1.9M increase in trade receivables and a £1.8M increase in plant and equipment. These were somewhat counteracted by a £3.8M fall in cash levels. Assets were also up during the year with the big increases seen in trade payables, up a hefty £8M and the pension obligations, which increased by £3.5M. Most other liabilities decreased but net tangible assets still fell by £3.5M to £87.6M.
The cash profits were £2.1M lower at £43.6M before adverse movements in inventories and receivables were counteracted by an increase in payables before pension payments of £1.1M left the net cash from operations up by £4.9M to £42.1M. There was then a small amount of interest received from the cash balances and a hefty tax bill of £11.4M which meant that net cash from operations was £31.1M. This cash flow was entirely spent on dividends as a special dividend meant that £31.5M was given back to shareholders (this was £16.1M more than last year). This was instead of the purchase of their own shares (£5.2M was spent on this last year). Added to this, there was £3.7M that was spent on capital expenditure. Overall there was a cash outflow of £3.8M which, when it is considered that dividend payments doubled to £31.5M is very good really. It is worth noting the higher value of trade payables, however.
Raw material prices were broadly level with the last two years but were at historically high levels. The more pressing issue in this industry is apparently the excess capacity and the battle to gain volume.
The Scandinavian business performed well with Norway advancing sales 5% and Sweden rocketing by 23%. The market in Norway picked up towards the end of the period with increased activity in healthcare and education. Some projects included the new HQ for the Department of Environment in Norway and the NKS Hospital and Tele2 Arena in Stockholm. The business in the rest of mainland Europe had a flat sales performance. Germany is a very large market for vinyl flooring and as such attracts a lot of competition despite the government belt tightening going on there which has led to an erosion of margins. This, along with the full effects of the new higher capacity warehouse had an effect of profitability. A revamped commercial range of Luxury Vinyl Tiles was launched in Germany and although it is facing some price pressure, performance has been good so far. The group supplied flooring to Jena Social housing renovation project in Germany, one of the largest of its kind in Europe and was the major flooring partner in the Weissenhauser Strand development, a major holiday park at Kiel.
Oriental Asia sales were 8% ahead of last year and enjoyed some margin improvement too, with China in particular trading well as the group’s reputation and a competitive advantage due to the weakness of sterling took effect. This is particularly pleasing giving the potential there but at some point sterling may strengthen which would apply some pressure. The group supplied a good portion of the flooring for the 12th National Games of the People’s Republic. In contrast, Australia suffered somewhat and sales were down 11% as some large projects came to an end. However, there has been some good take up of from the retail sector there and all trains and trams in Southern Australia have James Halstead flooring. New Zealand is showing some tentative signs of recovery as turnover was up 2%. The group secured a tender for all social housing through “Social Housing New Zealand” as well as supplying flooring for the last 7 hospital refurbishments and supplying safety flooring to the number one bus manufacturer. Rebuilding work following the earthquake in Christchurch is also proving favourable for the group.
UK turnover increased by 4% and remains the most important market for the group. During the year a new safety floor design was released and sales of this have been encouraging. During the year the group also released a new luxury vinyl sheet for supply to the social housing market which is also proving to be a success. In the factory, the line speed has been upgraded along with capability but the slow-down in some overseas markets has been hampering productivity. Other examples of new contracts won include the Specsavers chain of stores in Sweden and the Wulanchabu hospital in Inner Mongolia.
Going forward, government spending is restricted in many markets and the outlook appears tough. There is not an extensive visibility in the refurbishment market and major contracts are contested keenly by all manufacturers so it appears than in the immediate short term the period of rapid expansion may be at an end.
Overall then, we have seen that revenues are down across all reporting groups but delving a bit deeper shows that these figures are hiding some good performers as the termination of the motorcycle accessory business clouded good UK figures; poor sales in much of continental Europe overshadowed strong Scandinavian turnover and the end of some large Australian contracts dragged results in that segment down in contrast to strong Chinese growth. The profit for the year was flat. In fact it was almost exactly flat but this was only due to the fact that a higher proportion of sales in the UK meant a lower tax bill due to the relatively favourable tax system here. Net assets were down mainly due to a higher level of payables but the fact that a special dividend was paid that almost doubled tax payments to shareholders had an effect on net assets. In fact, the small outflow of cash was excellent considering this massive pay-out.
Even after the big dividend pay-out this year, the group still has a net cash position of £34.7M. The dividend yield at the current share price is 3.1% not including the special dividend. If this was counted, the yield would be 5.5% which is a very good return. The current P/E ratio of 19.3 suggests that the stock is not cheap but when the net cash position is taken into account, and the fact that James Halstead is so cash generative then this no longer looks that expensive to me and I am tempted to top up here.
On 6th December, at the AGM the group announced that modest growth had occurred in turnover for both the UK and overseas markets with France in particular doing well. Raw material supply and input prices were steady, cash balances were solid and the first half results are likely to be within expectations. Overall a fairly decent update.
On 3rd February, the group released a trading statement covering the first half of the year. Central Europe, and France in particular did well and Oceania was on a par with last year. Unfortunately, after a poor December, profit overall will be 3-4% below the same period of last year on revenues 2% up on the same period. Apparently this was within expectations but still slightly disappointing.