Small-cap unveils double-digit dividend hike

A near 50% rise for Halfords Group (LSE:HFD) shares since April remained intact today after the motoring and bicycles business unveiled a 10% dividend hike alongside a forecast-beating annual profit.

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Other positives included very strong recent trading in the cycling market as the FTSE All-Share company reached this afternoon at 173.4p, its highest level since February 2024.

Broker Peel Hunt has a price target of 200p, believing that shares have the potential to re-rate if new chief executive Henry Birch is successful steering margins back to historic levels.

The City firm said: “The CEO takes over at the helm of a ship that has evolved well but has still to emerge fully from troubled waters.”

Today’s results showed an underlying profit of £38.4 million for the year to 28 March, a rise of 6.4% on last year and better than April’s guidance but down sharply on 2022’s £89.8 million.

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Like-for-like sales rose 2.5%, while cost savings of £35 million more than offset £33 million of inflation. The benefit of pricing actions, a greater mix of higher margin services and favourable hedged FX rates underpinned a 2.5 percentage point improvement in gross margin to 50.7%.

The company ended the year with £10 million of cash on its balance sheet, a swing from debt of £8.1 million the previous year. A final dividend of 5.8p is due to be paid on 12 September, an increase of 10% for the year to 8.8p and better than Peel Hunt’s 8p forecast.

The group has 373 Halfords stores, two Tredz performance cycling stores and 542 garages under names including Halfords Autocentres, McConechy’s, Universal and National Tyres. Retail revenues topped £1 billion in the financial year, out of a total of £1.71 billion.

In terms of progress so far in the new financial year, Birch said trends have been varied as the strong performance in cycling has been offset by further declines in the tyres market.

He added that the negative outlook for employment and impact of global instability continued to weigh on consumer confidence and had kept the savings ratio high despite rising real incomes.

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Birch said that levers including pricing strategy and further buying synergies meant the company expected to be able to mitigate substantial cost headwinds in the year ahead.

However, profits for the year are likely to be weighted to the second half after Birch reported additional costs in relation to the deployment of a new third-party warehouse management system at its second distribution centre in Coventry.

The former Rank Group and Very CEO, who joined the company 10 weeks ago, added that he plans to spend time in the coming months identifying priority areas for optimisation, most likely in the areas of technology and data.

Investec, which has a price target of 200p, said: “The valuation remains undemanding with potential material upside to forecasts when the consumer tyre and cycling markets start to recover.”