James Halstead Share Blog – Final Results Year Ended 2017

James Halstead has now released their final results for the year ended 2017.

Revenues increased when compared to last year as a £4.4M reduction in UK revenue was more than offset by a £12.4M increase in European revenue, a £5.5M growth in Asian and Oceania revenue and a £1.1M increase in ROW revenue. Staff costs increased by £2.2M, R&D costs were up £244K and other cost of sales grew by £3.4M to give a gross profit £8.8M higher than last time. Operating lease rentals grew by £355K and other selling and distribution costs were up £6.2M with admin expenses increasing by £1.1M which meant that the operating profit was £1.2M higher. Finance costs increased somewhat but this was offset by a lower tax charge and the profit for the year came in at £36.5M, a growth of £1.3M year on year.

When compared to the end point of last year, total assets increased by £16.6M, driven by a £10.1M growth in inventories, an £8.4M increase in cash and a £1.6M growth in plant and equipment, partially offset by a £2.2M fall in trade receivables and a £978K decline in deferred tax assets. Total liabilities were broadly flat over the period as an £8.5M growth in trade payables was offset by a £4.2M decrease in pension obligations, a £1.5M decline in accruals and some smaller decreases in other liabilities. The end result was a net tangible asset level of £110.8M, a growth of £16.6M year on year.

Before movements in working capital, cash profits increased by £888K to £50.3M. There was a cash outflow from working capital and tax payments increased by £462K to give a net cash from operations of £36.9M, a decline of £3.3M year on year. The group spent a net £4M on fixed assets to give a free cash flow of £32.9M, of which £25.4M was spent on dividends to give a cash flow of £8M and a cash level of £52.5M at the year-end.

The group saw a boost to their exports due to the effect of the weakness in sterling on competitiveness but this was tempered by a fall in UK sales and turmoil in the supply chain of raw materials. The drop in the UK sales is entirely accounted by de-stocking at two of the larger distributors and the group are satisfied that the actual purchased by end users increased.

Raw material price increased noted in H1 continued into the second half as a result of an explosion at the BASF site in Germany followed by a fire at a Shell refinery in the Netherlands which interrupted supply of PVC. These events resulted in greater demand for raw materials from other manufacturers. In addition there was the withdrawal of a US supplier from the European markets and the currency cost increases as Sterling fell in value. In mitigation the group established relationships with three Asian suppliers and used bulk storage tanks in Teesside to reduce some of the cost effects and most of the shortages.

At the European operations growth in the Expona brand was offset by a reduction in the Karndean ranges. As expected there was a decline in turnover in Germany but growth in Belgium, Austria, Eastern Europe and Switzerland. The group have secured new national chains as customers, including Fitness First, Linzenich Fitness and Pfitzenmeier Group. The group also supplied retail outlets, hotels chains and the central police station in Frankfurt. In France, turnover was on a par with the record of the previous year with increased profit as a result of product sales migrating to higher margin lines.

In Asia, Australia and New Zealand, turnover was up6.8% and profit was greatly increased with margins improving by over 5% due to a favourable product mix and the ending of sales of discontinued stock, along with reduced freight costs by the realignment of stock holdings across the continent.

In Australia the group has supplied nationwide Woolworth stores, the Narrogin Hospital in WA and the Western Sydney University. The Hong Kong office continues to supply projects across China such as Qinhuangdou Welfare Hospital and the Fudan University Hospital of Shanghai. They have also supplied Toys R Us and Louis Vuitton in Hong Kong along with the MGM Casino in Macau.

New Zealand saw a modest 1% growth but with improved margins with good growth in the North Island offset by a decline in the South Island which is still affected by continuing uncertainty following the Christchurch earthquake some years ago. The group retained the NZ social housing contract which came up for renewal in the year and the group are also supplying retail, healthcare buses, B garages and the Rorotonga sports stadium in the Cook Islands. A key development this year was the move to the new warehouse in Auckland which is better suited to the current business needs, which has assisted with the profitability of the business.

At Polyflor and Riverside Flooring in the UK, turnover fell by 2.5% and profit was also down. The last year has been difficult in the UK. One of their major distributors was prepared for sale by its parent company which involved, de-stocking and a lack of investment. Another of the major distributors looked to rationalise stock and focused on margin improvement. The smaller, independent distributors, however, have focused on branded products and improved their market share.

Productivity improvements in line speed and capacity at Radcliffe combined with the flat UK demand led to some redundancies which had a financial cost but over £900K has now been invested into the Riverside plant in Teesside and the group can now offer in line registered embossing on their sheet and they have secured planning permission to extend the plant.

At Polyflor Nordic, Norway posted a small increase in turnover of 2% and the low oil prices in the recent past have had an impact on the market. Projects included the new Svalbard Satellite Station and the new Trondheim Spektrum Arena. Profit in Norway was comfortably ahead of last year. In Sweden, turnover declined by 8% but profit held up better due to swing to higher end products leading to better margins. There was some staff disruption due to the retirement of the MD, along with some other issues, which led to a poor second half to the year. As new sales strategies have been implemented, sales are improving, however. Close control of overheads means that profitability across the Scandinavian business has increased this year.

In Canada, turnover continued to grow with an 8% growth in distributor sales being offset by a decline in direct sales to the mining sector. The group supplied national retailers such as Boston Pizza and Booster Juice as well as Landmark Cinemas and Chevron Gas stations. In addition, they worked on the Royal Victoria Hospital, the National Hockey League NHLA HQ and Omers Towers in Toronto.

The group had a good year in India as this relatively new business reported a small profit. They have exited the start-up phase of their move into this market and several healthcare projects have contributed to this record year, such as the Humancare Trust Hospital in Dwarka, the Royalcare Super Speciality Hospital in Coimbatore and the ESIC Medial College in Mandi.

In the ROW markets, the group worked on the Banco De la Natu in Mexico City, Salalah airport in Oman, the new Schengen terminal at Athens airport and Tamana University in Trinidad. Their distribution network has performed well with several countries at record levels of turnover.

Going forward, trading since the year-end has been strong, particularly in the UK and the supply chain issues have been largely resolved. In addition both Australia and France has reported record sales in the first two months of the year and taking this into account the board are confident of progress in the coming year.
At the current share price the shares are trading on a PE ratio of 26.7 which decreases to 25.7 on next year’s consensus forecast. After an 8.3% increase in the dividend the shares are yielding 2.8% which increases to 3% on next year’s forecast.

Overall then this has been another solid year for the group. Profits increased, net assets grew and although the operating cash flow declined, this was due to working capital movements and cash profits increased with plenty of free cash being generated. The weakness of Sterling certainly helped the group grow its exports but some major headwinds included the turmoil in the raw material market and destocking at the major UK distributors, both of which seem to have improved. The German market also seems to be struggling but despite this, the performance overall was good.

With a forward PE of 25.7 and yield of 3% these shares are not cheap but sometimes you get what you pay for and the shares just could be worth this much assuming there are no big market shocks coming up.

On the 1st December the group released a trading update covering the first five months of the year where they stated that current trading continues in line with budgets.

On the 29th January the group released a trading update covering the first half of the year. Turnover has increased by 5%, boosted by a strong December, and profit is in line with expectations and more than last year. The central European markets have been very competitive with very keen pricing but in early January a German manufacturer entered administration and announced the closure of its sheet vinyl and tile facility. This is expected to take place imminently and should ameliorate the pricing pressures they have been experiencing. Overall confidence for the full year is unchanged and remains positive.


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