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Travis Perkins is ready to rise

Travis Perkins is cheaply rated against its competitors and is ideally placed to take advantage of an upturn in economic activity, even if the short-term outlook might be a bit soggy.
February 20, 2014

Travis Perkins (TPK) releases full-year figures for 2013 later this month, and it will be interesting to see whether there is any comment about how the bad weather is affecting business this year, much in the same way that last year's start was affected by "unseasonably cold weather". Whatever is said, it's worth pointing out that the current storm clouds have a silver lining, and the UK's leading builders' merchant Travis Perkins is well placed to benefit from an upturn in demand.

IC TIP: Buy at 1876p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Strong sales growth
  • Housebuilding uptick to lend support
  • Maintenance backlog set to unwind
  • Further cost savings
Bear points
  • Retail market still subdued
  • Weather will affect short-term performance

Work on domestic and commercial projects will almost certainly have been affected, although January and February usually record relatively low levels of activity, anyway. The plus point is that most work will be delayed and not cancelled, on top of which there will be a significant amount of repair work to be carried out in the wake of the recent floods and high winds. Evidence of this came in the first half of last year after poor weather conditions early on caused sales to accelerate sharply in May and June.

Travis Perkins is in a strong position to benefit from any trading uptick, thanks to its national network of builders' merchants outlets and its chain of Wickes retail stores. And more demand is likely to come from the current housebuilding renaissance, especially now that the Bank of England has indicated that interest rates are set to remain at current lows for some time yet. The better tone was shown in figures for the third quarter, when general merchanting - that's planks of wood, ballast, bricks etc - pushed total sales ahead by 13.9 per cent. Plumbing and heating sales were up by 5 per cent, but the retail side has yet to show any significant breakout, with total sales up just 1.6 per cent.

TRAVIS PERKINS (TPK)
ORD PRICE:1,876pMARKET VALUE:£4.6bn
TOUCH:1,874-1,876p12-MONTH HIGH:1,912pLOW: 1,228p
FORWARD DIVIDEND YIELD:2.7%FORWARD PE RATIO:14
NET ASSET VALUE:969pNET DEBT:17%

Year to 31 DecTurnover (£bn)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
20114.7929793.120.0
20124.8530095.125.0
2013*5.0030710230.0
2014*5.3936412040.0
2015*5.7941013550.0
% change+7+13+13+25

Normal market size: 1,500

Matched bargain trading

Beta: 1.28

*JPMorgan forecasts, adjusted EPS and PTP figures

Part of the reason for the modest gain on the retail side is the fact that its retail chains, Wickes and Tile Giant, have a limited range of outdoor-related goods, and therefore experienced little benefit from the summer season. Supplier price increases have also proved hard to pass on, which had an impact on margins in the first half. But measures taken to rein in costs meant that the overheads-to-revenue ratio in the first half remained flat.

And, with overall group sales accelerating in the second half, there is room to reverse the first-half drop in operating margins from 6.3 per cent to 6 per cent. What's more, the cyclical recovery provides the ideal platform to rebuild margins back to the heady days of 2007 when adjusted group operating margins touched 10 per cent. Group finances remain in pretty good shape, too, although greater investment in working capital is likely to inflate year-end net debt to about £370m.

Travis Perkins vs its peers

Forecast PEEV/EBITDA
201320142015201320142015
Grafton32.926.819.715.31411.5
Howden21.219.31812.91210.4
SIG2118.214.111.29.87.8
Wolseley18.716.614.612.611.910.7
Travis Perkins18.716.113.811.210.19
Merchants average22.519.416.112.611.99.9
Breedon40.933.524.915.512.210.7
CRH32.623.117.611.39.68.3
Low & Bonar12.311.810.37.46.55.9
Marshalls26.526.222.412.412.310.3
Norcros12.111.710.9108.47.9
Materials average20.918.215.310.39.28.1
Source: Numis Securities