James Halstead Share Blog – Final Results Year Ended 2019

James Halstead has now released their final results for the year ended 2019.

Revenues increased when compared to last year as a £1.4M reduction in European revenue and a £2.3M fall in Asia Pacific revenue was more than offset by a £6M increase in UK revenue and a £1.3M growth in ROW revenue.  Staff costs were up £2.9M but R&D costs reduced by £1.5M and other cost of sales were down £2.1M to give a gross profit £4.3M higher.  There was an increase in selling and distribution costs and a £1.9M growth in admin costs to give an operating profit £1.2M higher.  Interest income grew by £207K and the pension interest cost fell by £138K but tax expenses were up £490K to give a profit for the year of £37.8M, a growth of £1.1M year on year.

When compared to the end point of last year, total assets increased by £18.7M driven by an £18M increase in cash and a £1.5M growth in property, plant and equipment partially offset by a £1.2M decrease in inventories.  Total liabilities also increased during the year due to a £9.4M growth in trade payables and a £4.7M increase in pension obligations.  The end result was a net tangible asset level of £129.8M, a growth of £4.2M year on year.

Before movements in working capital, cash profits increased by £1.4M to £52.4M.  There was a cash inflow from working capital and after interest received increased by £207K and tax payments grew by £845K the net cash from operations was £50.3M, a growth of £21.6M year on year.  OF this, only £4.3M was spent on capex to give a free cash flow of £46.1M.  The group paid out £28.4M in dividends to give a cash flow of £18M and a cash level of £68.7M at the year-end.

As a net exporter the group had an advantage with weak sterling but with many economies sluggish and projects slow to come to fruition, it was a year of difficult trading.  Looking at global markets, Europe was on a par with last year.  Their revenue in France, Holland and Spain demonstrated the best growth while Turkey and Italy were the worst performing.  The rest of the world is broadly positive with growth in South America, North America, Africa and Scandinavia while China has slowed.

In terms of raw materials, it was a year of stability and overall the cost of raw materials increased by just 0.52%.  Energy costs continue to rise with electricity some 12% more expensive. 

Turnover in Central Europe was solid but 1.2% below last year which reflected the downturn in the German market where all business is hard fought against strong competition.  Branded sales increased with declines in own label collections.  The main product launches were the revamped Expona Design and Expona Clic.  The Objectflor campus was opened in December.  This is a large showroom and training facility in Cologne.

James Halstead France made progress in all key regions which is encouraging following their investment in sales reps.  Their distribution network has broadened and whilst their market share is modest they are encouraged by their continued growth.  Whilst the French economy is not showing good growth, they do see the potential for increased market share and they continue to invest.  They also established an office showroom in the Netherlands. 

Despite a soft economy, the Australian business remained solid.  Volumes in most segments remained strong and stock management saw reduced working capital and strong cash flow.  Turnover was slightly below last year while the effects of exchange rates and increased investment in warehousing saw the profit decline.  Palettone took market share.  The AFL Max facility in Adelaide is a brand new facility that has installed the group’s product.  In addition their flooring has been used in the new concept Vape Square Lounge.

New Zealand showed good growth with sales increasing 4%.  The increased revenue led to increased profitability although the sales mix resulted in slightly lower margins.  The growth continued in the North Island while in the South it was generally tougher.  The business continues to have a high market share.  In the latter part of the year there has been focus on broadening the customer chains they are operating with which will increase the visibility of their products in the market. 

The changes in the management structure of the Asian business have been bedding down.  Investments have been made in the marketing taking greater control of this from their customers.  Their business is growing in Hong Kong but in mainland China there has been a distinct slowdown.  Plans to have a stock presence in China to access the smaller projects markets are at an advanced stage.

At Polyflor and Riverside in the UK, the year was challenging for production and towards the end of the year part of the plant was closed due to equipment failure.  This had adverse effects on overhead recovery and consequently profitability but these challenges are apparently behind them.  In Norway turnover grew 3.8% but in Sweden economic conditions have been difficult and turnover declined.

In Canada, sales grew 24% and brand awareness across the country continues to grow with increased specs.  The portable building sector continues to perform relatively poorly but successes in the commercial sector have more than compensated.  The business in Ontario has continued to grow and their new team in British Columbia have had good results.  They have continued to expand their presence in Vancouver. 

In India, both turnover and profitability has increased.  Their flooring continues to be laid in the healthcare and education sectors but they have also had success in the retail sector and in the defence sector.  There is encouraging interest from aligned markets such as Bangladesh, Sri Lanka and Nepal and volumes to these territories are increasing.

Last year the group opened an office in Dubai and they have continued to underpin their global sales with more representation in local markets.  In June they opened an office in Colombia to support sales in South America.

The constant focus on Brexit has led to deferred spending in several sectors and certain retail chains are curtailing their normal refurbishment cycles. 

Going forward, trading since the year-end continues to be solid, particularly in the UK.  In September, Polyflor was selected as a key supplier to the NHS and the board are confident of continued progress in the coming year.  The first two months has seen a 4% reduction in raw material prices.  The coming year will see a new phase of investment.  In part this will be the expansion of warehouse and distribution and this is one decision that requires some clarity over the UK’s relationship with the EU.  With simplified access to Europe they would increase warehousing close to manufacture in the UK but this could move to Europe if this is not the case. 

At the current share price the shares traded on a PE ratio of 30.8 which falls to 29.5 on next year’s forecast.  After a 3.6% increase in the dividend, the shares are yielding 2.5% which increases to 2.6% on next year’s forecast.  At the year-end the group had a net cash position of £68.7M compared to £50.7M at the end of last year. 

On the 6th December the group released a trading update covering the first five months of the year.  The trading environment in the UK is challenging and across all markets large projects are keenly contested by all manufacturers.  Nevertheless, trading is ahead of last year and at this time, they have continued to see modest growth in turnover and profit. 

Overall then this was a pretty decent year for the group.  Profits were up, net assets increased and the operating cash flow improved with plenty of free cash being generated, although this was boosted by working capital movements.  The UK is actually performing quite well, despite Brexit concerns with India seeming to be the other good performer.  Elsewhere growth is non-existent of sluggish.  Raw material costs have come down though.  With a forward PE of 29.5 and yield of 2.6% these shares are expensive but this is a quality company spewing off cash.  Not sure the value is quite there though.

On the 30th January the group released a trading update covering the first half of the year.  The encouraging turnover and profit performance continued into December and the group expects to attain record turnover for the half year.

Turnover in the UK was 6.8% ahead of last year.  Underlying margins held up but in the period July through to September, there were adverse manufacturing variances and increased labour costs associated with extending shifts and overtime subsequent to a significant engineering breakdown.  Notwithstanding this, the group expects to report record pre-tax profit for the half year.

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