Grafton and Howden Joinery benefit from home improvement boom

Despite the severe disruption from Covid-19 during the first half of the year, building materials supplier Grafton (GFTU) saw its adjusted operating profit dip by just 6 per cent overall in 2020, to £193m, beating the group’s most recent January guidance as well as analysts’ expectations. This reflects a strong second half recovery in profitability driven by the residential ‘repair, maintenance and improvement’ (RMI) markets in the UK and Ireland.

Amid the pandemic-inspired DIY boom, adjusted operating profit from Grafton’s Irish retail chain, Woodie’s, surged by almost 90 per cent to £42m. Home improvement projects also supported sales across the group’s distribution businesses, offsetting some of the weakness in demand from non-residential construction customers.   

Consumers’ penchant for home renovations has also benefitted trade-focused kitchen specialist Howden Joinery (HWDN). While depot closures during ‘lockdown 1.0’ saw the group’s UK sales plunge by almost 30 per cent in the first half of 2020, pent-up demand fuelled year-on-year sales growth of 16 per cent in the second half of the year. Although lower overall sales coupled with higher costs did mean that Howden’s operating profit dropped by a quarter in the year to 26 December, to £196m.

The group slowed its expansion plans during the pandemic, opening 16 new UK depots in 2020, versus 39 in 2019. But signalling improved confidence, it is aiming to roll out 35 new depots in the UK this year, and 11 new locations in the relatively immature French market where most kitchens are still purchased through DIY and specialist shops rather than trade outlets.

The deferral of store openings and refurbishments helped lift the group’s net cash (excluding lease liabilities) by almost two-thirds to £431m, although this was also flattered by £60m of supplier payments landing after the December year-end. Dividend payments have now resumed, with Howden set to hand shareholders a 9.1p per share special dividend in the lieu of the cancelled 2019 final payout and as well as 9.1p per share final dividend for 2020.  

Grafton reinstated its 2019 final dividend in January, and while there was no interim dividend for 2020, it has declared a final dividend of 14.5p per share. This comes as it finished the year with £182m of net cash (excluding lease liabilities), up from just £8m a year earlier.

Looking at the current financial year, Grafton has made a slower start thanks to the impact of lockdown restrictions in Ireland on its Chadwicks distribution business – average like-for-like revenue between 1 January and 21 February was down 1 per cent year-on-year. Meanwhile, despite consumers being more cautious about letting tradespeople into their homes during the current lockdown, Howden’s like-for-like sales in the UK were still up 5 per cent year-on-year in the first eight weeks of the year. But both companies should continue to bounce back as economies reopen and analysts are predicting that their earnings will surpass 2019 levels in 2022. With their shares having recovered to above pre-pandemic levels, the momentum will likely continue. Buy.

Last IC Views: Grafton: Hold, 891p, 27 Feb 2020; Howden Joinery: Buy, 540p, 23 Jul 2020