James Halstead has now released its final result for the year ended 2016.

Revenues declined when compared to last year due to forex movements (constant currency revenues were up 2%) as a £901K decline in European revenue, a £615K fall in UK revenue and a £187K decrease in Asian and Oceania revenue was partially offset by a £583K growth in ROW revenue. Staff costs increased by £1.3M but R&D costs were down £296K and other cost of sales fell by £3.3M which meant that the gross profit increased by £1.2M. Selling & distribution costs increased by £589K and depreciation was up £146K but other admin expenses fell by £802K and the operating profit was up £1.4M. There was a small increase in finance costs and tax was broadly flat so the profit for the year came in at £35.3M, a growth of £1.3M year on year.

When compared to the end point of last year, total assets increased by £4.8M driven by a £4.1M growth in inventories, a £1.8M increase in freehold land & buildings, a £2M increase in trade receivables and a £1.4M growth in plant & equipment, partially offset by a £3.3M fall in cash levels and a £1.8M decline in derivative financial assets. Total liabilities also grew during the period with a £6.9M increase in pension obligations, a £3.5M growth in trade payables and a £2.1M increase in derivative financial liabilities. The end result was a net tangible asset level of £94.2M, a decline of £9M year on year.

Before movements in working capital, cash profits increased by £1.4M when compared to last year. There was a cash inflow from working capital which was much more favourable than last year which meant that even after tax payments increased by £1.8M, the net cash from operations came in at £40.2M, a growth of £6.5M year on year. The group spent a net £4.6M on capex so the free cash flow was £35.6M. All of this and more was then spent on dividends so there was a cash outflow of £4.1M for the year and a cash level of £44.1M at the year-end.

The first half continued the worldwide growth the group saw in the early part of 2015 but the second half saw a distinct slowing down in UK sales whilst exports continued to expand. The malaise in the UK in H2 has been tangible and might be allied to the Brexit nervousness leading up to the vote. In addition, a cut to NHS repairs funds have affected demand with the 2016 budget reducing the repair fund by £1.1BN, some of which would have been allocated to flooring refurbishment.

Objectflor increased sales by some 3.7% in a highly competitive market. Germany is the largest market for vinyl flooring in Europe and the relative weakness of the EU marketplace has made all business hard won and there has been a degree of margin erosion due to the weakness of the Euro in the year causing a 3.5% fall in profits.

There was good growth in rubber flooring and heterogenous sheet progressed on the back of new range launches. Karndean branded sales of luxury vinyl tiles have expanded with the demand from retail shop fitters being solid. The group have adopted the policy of attending more regional trade fairs to meet contractors and their attendance at fairs in Lyon, Holzund and Belgium have been positive in gaining new business.

The French business continues to progress with a 12.5% increase in turnover. They have expanded their sales network in the country and improved customer service, the results of which have given them confidence to continue this investment. Their market share remains small but despite the difficult conditions they are taking business from competitors. Some of the projects completed last year include Le Bon Marche in Paris and the team in France won the project to supply flooring to Orange Telecom in Madagascar.

A restructuring of the sales focus in central Europe has seen the group target new market sectors for their products and in conjunction with new collections continue to attract market interest. During the year Objectflor has continued to show its strength in Germany and now also has a solid presence in the rest of Europe. Examples are the new Hyundai HQ in Belgium, the refurbished Marriott hotels in Rotterdam and Amsterdam and the Hotel Arora in Croatia. In Germany itself the Johannisgarten development of over 100 appartments in Erfurt has been supplied by the group.

The re-launch of the Artigo range of rubber flooring has apparently been well received. As a result of the growth in these markets, the group’s warehousing has reached capacity and plans are afoot to invest in an expansion of this facility which will encompass a new enlarged service centre, showroom and customer training facilities. In the Benelux they have revised their sales network and are now focused on this region as a stand-alone territory in order to further increase their market share.

Polyflor Australia increased turnover by 7% in constant currency terms but the adverse translation effect was about 8%. New management in Australia has overseen a total re-evaluation of this business and throughout the year there has been a growth in market share with sales teams securing many new products such as 135 Woolworth stores and 55 Kmart stores. Against a flat economic backdrop, with a 5% reduction in construction, the core sales sectors in healthcare, retail and educations are moving against this trend.

Internally the group have made logistics changes over the past eighteen months which have resulted in discontinued stock standing at less than 2% of total inventory. In addition, they have boosted their representation to architects and improved customer service focus by extending operating hours to support an expansion of next day delivery. Further customer service gains should ensue on the re-location of the Victoria warehouse, for which plans are at an advanced stage. Overall the board believe that the main rewards of the restructuring are yet to come and expect sales and profit in the country to continue on an upward trend.

In New Zealand sales were 9.4% ahead in constant currency terms as the country continued its steady recovery and grew its sales of Polyflor manufactured products. They continue to win projects and with the pending move to new warehousing in Auckland they anticipate a further year of growth.

Asia by contract has proved to be a difficult market through the year with margins under pressure. In response, the group focused on the price structure in this market along with a focus on core market sectors such as ship building, healthcare and education infrastructure projects. Whilst they continue to win projects, the day to day distribution business remains difficult to access.

There was a 0.7% decline in UK turnover but profit margins held up due to raw material prices softening and improved plant productivity at Riverside. In Radcliffe, the latter part of the year saw adverse volumes, mainly from the UK, leading to over-capacity against the shift patterns. To a great extent this was also the result of improved line speed and conversion improvements meaning that the same volume could be produced with fewer man hours. This led to a period of short time working and the redundancy of 26 employees. The reduced volumes were mainly of homogenous sheet vinyl and the luxury vinyl tile and heterogeneous sheet vinyl production continued to grow.

Notwithstanding these issues, the UK profits increased. Their market share remains unchanged and during the year the Voyager Maritime Collection targeted at marine shipping was re-launched; their Simplay loose lay luxury vinyl tile collection was re-vamped and Polysafe Wood FX, a heterogenous sheet was re-launched with new colours.

The Scandinavian markets saw less sales activity than in the prior year with a 10% shortfall against 2015. Sales of Polyflor products remained strong, however, and overall on a par with the previous year. Sourced product sales did not fare so well in this market, being very much project oriented in a year where projects were fewer. The Norwegian market was sluggish and in Sweden projects were very competitively fought.

The business in Canada goes from strength to strength and the group have increased sales resources in response. The retail sector continues to present new projects and the group have supplied numerous clients of which a few examples are Shoppers Drug Mark, Indigo and Good Life Fitness with their flooring solutions. Healthcare and education are also key markets and recent successes include the Bergeron Centre in York University, Toronto. As a result they now have a programme to invest further in expanding their sales network and service.

The group continues to build their structure in India which is still largely in the formation stage, although they have now appointed dealers in the key cities of Mumbai, Bangalore, Chennai, Hyderabad, Cochin, Delhi and Kolkata. Their sales team are focused on gaining specifications for products in the healthcare, education and retail sectors. Current projects include Made Easy Primary School in Delhi and Howards Storage World in Bangalore. Although projects are being won and sales continue to grow it will take time before this market delivers the true results they are aiming for.

The average exchange rate for the year impacted adversely on turnover but as exports represent 67% of the business, the decline in sterling following the Brexit vote offers opportunity for further progress. The group continue to have a large market share in the UK but the curbing of repair and renewal spending by the NHS was very noticeable in the first two months trading of the new year. Refurbishment in the education sector too has seen reticence in this period, which is uncharacteristic. The UK accounts for about a third of business, however, and the doubts over the economy in the weeks after the Brexit vote seem to be lessening.

At the current share price the shares are trading on a PE ratio of 29.2 which falls to 27.6 on next year’s consensus forecast. After an 8.2% increase in the final dividend, the shares are yielding 2.4% which increases to 2.6% on next year’s forecast.

Overall then this has been a bit of a mixed year for the group. Profits did increase, as did the operating cash flow as the group continued to generate plenty of free cash. The net asset level did see a decline, however. European performance came under pressure due to margin erosion related to the weak Euro and the performance in Scandinavia was flat. Australia and New Zealand are doing well operationally, but again forex movements restricted growth. The Asian market was tough and the UK is not looking as good as it did with NHS cuts to refurbishment, although the group did increase profits there this year.

Going forward, the cut to the NHS refurbishment budget is a concern, as is the reduction in education refurbishment but this remains a quality company. Despite this, I feel the forward PE of 27.6 and dividend yield of 2.6% are a little expensive at the moment and I remain out of the share.

On the 2nd December the group released a trading update covering the first five months of the year. The fall in the value of Sterling following the Brexit vote has contributed to increased margins on overseas sales, increased competitiveness and positive growth. There are off-setting price pressures from the lower value of sterling but overall the benefit is positive.

The decline in UK revenues noted in the full year results has continued. There is no slippage in market share, but the market itself is lower than last year with a reduction of around 5%. Nevertheless these were known factors and management has factored them into budgets.

In recent weeks there has been a significant upward pressure on the pricing of plasticiser, one of the key raw materials, due to a suspension of production following an explosion at one of BASF’s European plant. They are not one of the group’s main suppliers and to date they have been able to access appropriate volumes elsewhere in the market but their failure to supply has raised industry prices and introduced supply chain delays and shortages which may well continue into the second half of the year.

In conclusion, trading has been challenging and making progress against the comparative half year will be difficult but cash balances have grown which underpins a further 8.2% increase in the dividend being proposed and the board are confident in the prospects of the company going forward. That being said, there is nothing here that makes me want to re-enter here.

On the 30th January the group released a trading update covering the first half of the year. Turnover has increased by some 3-4%, boosted by a confident December and profit is in line with expectations. The raw material issues have ameliorated to a degree and major retailer contracts continue with customers such as Vodafone, Co-Op, Specsavers and Premier Inn. Confidence in the full year is unchanged.