Howden Joinery passing costs increases to customers

Howden Joinery (HWDN), the supplier of kitchen materials, has benefitted from the boom in the UK housing market and increased appetite for home improvements. There were 822,000 transactions of residential property in the first half of 2021, according to the Office for National Statistics - the highest in a six-month period since 2007. Little wonder that Howden jumped to an operating profit of £124m in its first half, compared with a loss of £9.8m in the same period last year. 

Not even rising prices appear to be weighing on the company, as management shifts “significant cost inflation” related to Brexit and Covid-19 onto customers. Gross profit reached £481m, up by almost a fifth against the comparative period. Higher pricing accounted for £22m of this increased profit and massively outweighed the extra £6m of cost pressures. This in turn contributed to an operating profit margin of 15.8 per cent, well ahead of 11.9 per cent in 2019. 

Such strong performance enabled Howden to generate net cash inflows of £93.7m, up from £44.1m in the same period last year, even as working capital increased by £27.5m to mitigate against supply chain shocks. 

Management is clearly feeling confident, having opened seven new depots in the first half, bringing the total to 754. The company now believes there is potential for 900 across the UK.

These plans are ambitious – but expensive. The group warned today that it expects its capital expenditure to grow by more than a quarter in the full year to reach £90m. It has spent £23.8m so far. 

Still, management is convinced that demand will remain despite continuing “economic uncertainties” and difficult upcoming comparators in the second half of the year. If next year housing transactions were to return to the average level since 2010 (560,000 each six months), then the UK kitchen market could shrink by around 50 per cent.

Even if the market does adjust back to the pre-pandemic levels, Howden’s recent investments should help it to capture a larger proportion of it. The company has also built up a stronger position in solid surface worktops, a segment that it was previously under-represented in, and work on its website has caused a 52 per cent year-on-year increase in traffic. 

Consensus estimates compiled by FactSet suggest a forward price to earnings multiple of 23, which we do not think looks so demanding for a company that still has plenty of scope for new growth. Buy. 

Last IC View: Buy, 540p, 23 July 2020