ii view: Woodie's and Selco owner Grafton breaks records

Shares for this building materials distributor and DIY retailer are trading at record highs. We assess prospects. 

First-half results to 30 June 2021  

• Revenue up 46% to £1.03 billion
• Operating profit up 256% to £152 million
• Adjusted operating profit up 204% to £142.4 million
• Net debt down 56% to £210 million
• Dividend payment of 8.5p per share (H1 2020: Nil)

Chief executive Gavin Slark said:

"2021 marks a key phase of a very considered strategic transformation we have executed at Grafton over recent years, which today comprises a portfolio of high returning, differentiated businesses with the capacity to grow and outperform in our chosen markets.

"The overall outlook for the Grafton businesses is positive given the strength of our current market positions, geographic diversity, strong balance sheet and investment pipeline, alongside supportive sector and macro trends together with the successful rollout of vaccines to date in the four countries where the Group now operates."

ii round-up:

Building materials distributor and DIY retailer Grafton Group (LSE:GFTU) today reported record first-half profit as building and new housing activity gained momentum following an easing of pandemic restrictions earlier in the year. 

Operating profit for the owner of Selco in the UK jumped by 204% to £142 million, helped by a particularly strong performance for its Woodie's DIY, home and garden business in Ireland. 

Grafton, which operates across the UK, Ireland and Netherlands, earlier in the year agreed the sale of its traditional UK merchanting business including such brands as Buildbase for £520 million to enhance shareholder value and enable it to focus on international expansion. 

Grafton shares rose by more than 1.5% in UK trading, bringing their gain since the start of the year close to 45%. Shares for fellow builders’ merchants and owner of Toolstation, Travis Perkins (LSE:TPK), are up by a similar amount. 

Dublin headquartered Grafton’s other builders’ merchants or distribution brands outside of Selco in the UK include Chadwicks in Ireland and MacBlair in Northern Ireland. Investment in its Selco brand helped like-for-like sales gain by 16.7% compared to the pre-pandemic 2019.

Chadwicks, the market leader in Ireland, experienced strong demand from mid-April onwards as Covid restrictions eased. Essential retailer status for its DIY retailer Woodie’s outlets in Ireland left its stores open for the duration of the period, helping its profit margin to more than double. 

Its manufacturing business reported improving volumes for its mortar making CPI EuroMix business. Its newly acquired staircase maker Stairbox enjoyed the highest profit margin for any Grafton business ever of 36.7% during the period. 

An interim dividend of 8.5p per share was declared. Accompanying management outlook comments offered some caution given ongoing supply disruption, but overall proved positive in tone. 

ii view:

Grafton operates across the three areas of building merchants or distribution, retailing and manufacturing. Distribution, led by its UK Selco business, generates around 80% of sales. The balance is split between retailing at 15% and manufacturing at 5%. Geographically, the UK leads at around 45% of sales, followed by Ireland (41%) and then the Netherlands (14%). 

A previous strategic review of the business has seen it sell many of its less known UK building merchants, allowing it to expand overseas. In July, it acquired Finland’s Isojoen Konehalli Oy and Jokapaikka Oy (IKH) for £199.3 million. IKH is expected to be earnings enhancing from completion. 

For investors, building merchants and DIY retailers are cyclical in nature, and economic uncertainty because of the pandemic persists. Government finances across many countries are now stretched, and assistance to UK house buyers has been curtailed. Supply disruption due to Covid also needs to be remembered. 

However, these latest results offer a picture of strong trading. Grafton enjoys both business and geographical diversity, and the payment of an interim dividend suggests management confidence in the outlook. Robust cash generation has reduced net debt, while its business portfolio has been rejigged. In all, and with analysts estimating a fair value share price of £14.17, potential for longer-term upside persists. 

Positives: 

• Both business type and geographical diversity
• Looking to expand overseas

Negatives:

• Economic uncertainty
• Price to NAV of 2.1 times, above 3 year average at 1.4 times

The average rating of stock market analysts:

‘Buy’