James Latham supplies joiners, door and kitchen manufacturers, shopfitters and other market sectors entirely in the UK, offering a range of wood based panels, natural acrylic stone, hardwood, high grade softwood, flooring, cladding and decking. They also supply commodity and specialist products to timber and builders’ merchants. The company was taken public in 1965 and they are quoted on the AIM market. The Latham family still owns over half of the company shares and six members of the family work in the business.
It has now released its final results for the year ended 2015.
Revenues increased by £11.7M when compared to last year and cost of inventories grew by £10.9M but other cost of sales fell so that gross profit was up by £2.4M. Distribution staff costs increased by £393K and other selling & distribution costs grew by £831K, mainly as a result of higher haulier costs. We also see admin staff costs increase by £1.7M but this was mostly offset by a £1.5M decline in other admin expenses but the lack of a £1.8M one-off receipt following the change from RPI to CPI in the pension scheme meant that operating profits fell by £711K when compared to 2014. The finance cost on the pension liability fell by £319K, again due to the change in inflation calculation but this was more than offset by a £397K growth in tax expenses as the last of the carried forward losses were utilised so that the profit for the year came in at £7.8M, a fall of £769K year on year.
When compared to the end point of last year, total asset increased by £5.6M driven by a £4M growth in inventories, a £1.3M increase in cash and a £1.1M growth in trade receivables, partially offset by a £762K decline in the value of plant and equipment. Total liabilities also grew during the year due to a £1.2M growth in the pension obligation, and a £1M increase in trade payables. The end result is a net tangible asset level of £61.9M, an increase of £4.1M year on year.
Before movements in working capital, cash profits increase by £766K to £10.9M. There was a cash outflow from working capital, however, with a particularly large increase in inventories resulting from overstocking due to erratic shipments of commodity products in Q4, and after a £657K increase in tax paid, there was a net cash from operations of £4.2M, a decline of £2.5M. This more than covered the £383K spent on property, plant and equipment, mainly relating to the purchase of lorries to give a free cash flow of £3.8M which was then spent on dividends and a £234K repayment of borrowings to give a cash flow for the year of £1.3M and a cash level of £12.5M at the year-end, although the lowest amount of cash held during the year was £5.9M (I like the fact that the group tells us this).
Revenue continued to grow during the year, due to increased volumes both in ex-warehouse and direct business with a modest increase in some prices. Year on year growth was slightly lower in the second half of the year due to a very strong Q4 in the prior year. Both panels and timber grew revenues throughout the year and the gross margin increased by 0.4% due to a better product mix with improving margins on the specialised products offsetting continuing competitive pressure in other markets. Timber and panel prices remained steady throughout the year. Focus panel products including Melamine Panels and Door Blanks, continued to show good growth. Accoya modified wood and WoodEx, the group’s brand of engineered timber for the joinery sector, were particularly successful this year.
Panel sales were 7.3% higher at £124.9M with volumes up nearly 5%. The group’s strategy continues to be to target markets for decorative surfaces to include veneered and melamine panels, laminates and natural acrylic stone plus flexible panels. The range of hardwood and softwood plywood has gained market share. Turnover of MDF was steady throughout the year showing a small volume increase in a static market. One positive area was a large increase in sales of Medite Tricoya Extreme Durable MDF. Development of added value OSB and its competitiveness versus plywood has enabled the group to grow sales into merchants and manufacturers. During the year they launched LuminFirePro, a fire retardant plywood and more fire retardant products will be launched in the new year.
Sales to importers, timber and builders merchants showed good growth during the year and a wide range of core fit for purpose and added value products, supplied ex stock, has enabled the group’s customers in this sector to grow their sales.
Timber sales at £50M were 7.3% higher than last year with volumes nearly 2% higher. Joinery, kitchen and shop fitting sectors have all shown sales and volume growth. The core business for African, European and North American hardwood was reviewed during the year with a more strategic product and purchasing policy being put into place. Supply issues in parts of Africa eased leading to a large influx of product into the market during the second half of the year which impacted on sales and margins.
The group’s own engineered hardwood and softwood brand, WoodEx, continued to make inroads into the joinery sector, and Grandis 690+, made of laminated eucalyptus, was launched in the second half of the year and sales have been good. The established range of Sapele, Redwood and European Oak has also seen good growth. The largest growth area for the timber business, however, was Accoya Modified Wood and very strong sales have been made into the external joinery sector. Profi-Deck and Lifecycle wood plastic composite decking sales into merchants and to contractors have shown good growth and the group have redefined their range of Bausen flooring, removing some lines of solid flooring and replacing them with new engineered floors including the Henshaw range.
During the year the group introduced Xylocleaf, a high definition melamine panel for shop fitting, furniture, kitchens and bedrooms; and Kydex, a thermoformable plastic product for shop fitting, doors and the transport sector. The group are also looking to develop new markets such as Ireland and other export markets. They will also continue to invest in their depots, with advanced plans drawn up for relocating their Yate and Wigston depots over the next two years, as well as improvements to racking systems in their Thurrock, Hemel Hempstead and Purfleet depots.
Overheads were within the budgeted forecast but higher than last year due to the extra volumes, smaller order size and later order times for next day delivery. Staff numbers increased during the year with sales staff recruited in areas of the business where the board see opportunities. Bad debts were low overall for the year despite the high level seen in Q1.
The group operates a contributory defined benefit pension scheme which is closed to new entrants, and a defined contribution group scheme has been established for the pension provision of all other employees. The net liability currently stands at £10.4M with a total benefit obligation of £64.4M and the group intends to contribute £876K to the scheme next year. If the inflation rate increased by 0.25%, the deficit increases by £1.6M; if life expectancy increased by one year, the deficit increases by £2.1M; and if the discount rate falls by 0.25%, the deficit increases by £3.2M. During the previous year the trustees of the scheme amended the index used to measure inflation from the RPI to the CPI and the company have agreed a recovery plan over two years, paying £1.2M this year and £420K next year.
As well as the pension deficit, the main risk is probably that of a slowdown in the UK economy with the construction industry being the most important.
There is little in the way of debt but there is only £1M of undrawn bank facilities available. I am not too sure what the cumulative preference shares are but they are held on an ongoing basis and pay pretty hefty dividends of 8% per annum. At the end of the year, the group has £413K of capital commitments contracted for but not provided for in the accounts. Plans are being drawn up to upgrade the two older sites at Yate and Wigton over the next two to three years, to emulate the success that investment in new facilities has delivered elsewhere.
So far this year, revenues are 7% higher than in the corresponding period last year, both in panels and timber, and the gross margin is also higher. It is a steady start to the year and generally customers are busier than they were in Q4 2015. The panels market remains competitive but the group are seeing encouraging growth in the newer decorative products they have introduced.
At the current share price the shares trade on a PE ratio of 17.3 which falls to 15.4 on next year’s consensus forecast which is not really that expensive. After a 9.6% increase in the annual dividend, the shares yield 1.8% increasing to 2% on next year’s consensus forecast.
Overall then, this seems to have been a steady year for a steady company. Profits did fall but this was only due to a one-off gain on the pension scheme last year and if we take this off, profits increased. Net assets were up too but operating cash flow declined. Again there is a caveat here too as the fall was entirely due to a cash outflow from working capital due to overstocking following erratic Q4 orders and cash profits increased year on year to give plenty of free cash. Sales of both panels and timber improved with the specialist project margins holding up better than the commoditised product margins which were affected by an influx from Africa following the easing of supply issues.
It is worth noting that order sizes have fallen whilst lead times have also declined which makes trading a bit more awkward and there are pension risks here too. Of course the most prevalent risk is that of a downturn in the UK economy, particularly the building sector, but this still seems to be some way off and for now the new year has started well which means with a forward PE of 15.4 and dividend yield of 2% these shares are probably priced about right.