HWDN Hold - Beaufort Securities



Howden Joinery Group (LON:HWDN) ? Hold

Howden yesterday reported a good sales performance to date in the second half of 2015, including during the important October trading period. In light of this, the Board stated it remains well positioned to achieve market expectations for the full year. It noted, however, that the two remaining trading months still have to be completed and together typically account for over 10% of annual revenues. Howden Joinery UK depots? total revenue in the second half of the year to 31 October increased by 12.8% and this was achieved in the face of toughening comparators that have been seen since June. As a result, in the first 44 weeks of 2015 total revenue was up 12.0%, rising 9.3% on a same depot basis. Gross margin performance also remains in line with expectations. The Board went on to remind investors that, as part of the £70m share buyback programme announced on 25 February 2015, the Group has acquired 6.4m shares. This takes the total acquired this year to 7.2m, for which the consideration was £35m.

Our view: Howden is lumped within the wider basket of UK building and residential services/distribution groups, such as Travis Perkins, Wolseley, SIG, Grafton etc. Activity levels at Tool and Equipment Hire businesses, like HSS Hire, also provide a good lead indicator for the sector. Indeed, it was HSS that provided the first warning of a surprisingly sharp and unexpected sector slowdown back in July; this was latterly followed by a rash of ?shock-horror? tales from a number of Howden?s peers. The net result has been a widespread sector correction which, more recently, has even spread to the mainstream UK house builders. Yet, surely times can have rarely been better for UK building materials suppliers and equipment hire groups? The public, as ever, love nothing more that adding value to their properties while prices spiral ever upwards. Surely RMI activity should be booming against a background of more relaxed planning legislation and low interest rates/energy costs, while demand-side subsidies also power new UK housebuilding as the Government aspires to lift starts as far as 250,000/year in an effort to quell growing public disquiet over the lack of affordable housing? So what could have gone wrong? One obvious tremor was felt ahead of May?s general election, when polls confidently predicted a Labour party majority; another resulted from legal change that contrived to concentrate contractor vacations during the traditionally busy August-early September period. So It is quite possible that these together resulted in the unexpected activity hiccup; it is also true that a warm and relatively dry Q4?15 could subsequently result in momentum picking up quite sharply once again. Assuming Boards across the sector seek to update shareholders of such an outcome in pre-close statements just ahead of Christmas, it would be reasonable to anticipate share prices rebounding. In the meantime, of course, they may simply tread water for the next six or seven weeks. So what about Howden itself? The shares have sharply outperformed the FTSE250 over the past year and yesterday?s relief bounce repaired much of the recent damage. Trading on 20x earning for this year and 18.2x for next while coming with only a modest yield, suggests almost everything is now in the share price. Beaufort accordingly takes its recommendation down from Buy to Hold while awaiting reassurance about activity levels during the important Nov-Dec period.