Telegraph Questor says HOLD!



Questor share tip: Howden Joinery falls on cost concerns
The kitchen specialist is enjoying steady revenue growth but rising costs take the shine off profits, says Questor

Howden Joinery
Questor says Hold

Howden Joinery [LON:HWDN] is enjoying strong trading as a UK housing market recovery boosts home improvements, but rising costs yesterday took the shine off results sending shares more than 8pc lower.

Kitchen clean up
The kitchen specialist has benefited from people who can?t move up the housing ladder, deciding to stay put and upgrade their existing home. Sales increased by 11pc to £483m during the 24 weeks to June 13 when compared to the same period last year.

Matthew Ingle, chief executive, said: ?We are opening more customer accounts, designing more kitchens and selling a wider range of product than ever before.?

Investor concerns

It was a strong sales performance but investors were more concerned by rising costs eating into profits. Costs were up £28.8m, or 13pc, to £246.6m, increasing at a higher rate than sales.

This meant the operating profits were only up 6pc to £60.9m despite the 11pc increase in sales during the period. The market had been looking for a profit performance around the £62m mark.

The company added that in order to maintain the growth rates in the business it will require continued investment.

So, while sales will continue to grow impressively, the profit performance will lag. The operating profit margin slipped from 13.2pc to 12.6pc during the first half.

Growth plans

The FTSE 250-listed kitchen and joinery group is still a successful and growing company.
The company opened 14 new depots in the UK bringing the total to 603, and this is on target for the long-term strategy of opening 30 new depots every year.

An overseas expansion is also taking place, albeit at a more moderate pace. The company opened three depots in northern France and there are plans to expand into Germany and Holland.

Shares fully priced

Shares in Howden Joinery have enjoyed a fantastic run, soaring from lows of 13p in early 2009. The shares are now trading on 20 times the forecast earnings per share. Market consensus is for full-year

pre-tax profits to rise to £211m, giving earnings per share of 25.4p.

Questor thinks Howden is a great company but investors are taking a far too rosy view of the future. The building supplies industry has always been and will remain a highly cyclical business. It could be the case that the housing market boom has years more to run. That said, the current share price makes no allowance for a slowdown.

The impact rising interest rates on the housing market and consumers is unknown. As an investor, Questor would resisting buying at these prices.