James Latham’s profit surge amid construction materials shortage

Initial disruption from the pandemic saw James Latham’s (LTHM) revenue drop a fifth year on year between April and August 2020. But as demand recovered, the timber products distributor actually increased sales by just over 1 per cent in the year to 31 March to £250m.

The group sells to trade customers rather than the general public, providing everything from wood-based panel products such as plywood to MDF mouldings such as skirting boards. Unsurprisingly, its biggest market is construction and housebuilding, with merchants and joiners typically comprising around two-fifths of overall sales.

Like-for-like volumes rose 7 per cent last year and the group says that further volume increases were limited by manufacturers introducing quotas. While James Latham focuses on customers in the UK, the need to import products means it is exposed to the dynamics of global commodities markets.

Construction materials have been in short supply over the past year, sending prices soaring. This has been particularly true of lumber, the price of which surged from $405 (£565) per thousand board feet (bft) at the beginning of 2020 to a peak of $1,686 in May 2021. North America has been a key driver of higher lumber prices as sawmills struggled to keep up with the boom in housebuilding, home renovations and DIY projects.

James Latham says that the prices of its products began to rise “significantly” in the second half of the year, and by the end of March they were on average 7 per cent higher than a year earlier. This meant that while revenue growth was rather sedate, operating profit jumped almost a fifth to £19m, with the margin expanding by 1.1 percentage points to 7.6 per cent.

The price of lumber has dropped dramatically over the past month as sawmills ramp up production and some customers defer purchases. But it remains above pre-pandemic levels at $891 per thousand bft and Samuel Burman, assistant commodities economist at Capital Economics, believes that “overall lumber consumption will remain high in the coming months”.

James Latham’s chairman, Nick Latham, says “the current challenging supply situation looks set to continue through 2021, but visibility beyond that is much more uncertain”. For now, high levels of demand have carried over into the new financial year and the group anticipates that margins will remain elevated for the next few months.

James Latham’s shares have rebounded strongly from the ‘Corona crunch’ and are now trading above pre-pandemic levels. The group has minimal borrowings and with net cash more than doubling to £24m it has increased its final dividend by 55 per cent to 15.5p a share. Buy.

Last IC View: Buy, 864p, 25 Nov 2020