Kingspan delivers record performance

Kingspan’s (KGP) annual results were a tale of two halves. On the one hand, the building materials supplier was dogged by rising costs. There was also “dramatic input inflation”, with the price of key raw materials increasing sharply. At the same time, however, the group managed to widen its profit margin, and enjoyed a substantial earnings boost.

Kingspan achieved this feat by raising its prices – a lot. Around €700m (£583mn) of cost increases were passed through to market in 2021, resulting in a “record performance”. Sales, profits, and earnings per share all dazzle compared with 2020’s lacklustre growth.

Insulation panels – which account for the bulk of company sales – have proved particularly profitable, with trading margins rising by 1.3 percentage points to 12.3 per cent. Demand has been driven by strong construction activity, and Kingspan noted that non-residential newbuild construction has been particularly buoyant in many of its key markets Overall, the group's trading margin has risen from 11.1 per cent to 11.6 per cent. 

The question now is whether demand for building materials will stay high, and whether the industry can stomach further price rises. The second half of 2021 was less impressive for Kingspan, with order intake easing off, particularly in the fourth quarter.  However, the order backlog for insulated panels at the end of 2021 was 28 per cent higher than the previous year, as high energy costs are likely to support demand for its insulation products. 

Expansion is now top of the agenda. Kingspan said the organic volume expansion it is experiencing requires new greenfield facilities in France, Romania, the US, Brazil, Vietnam and Australia. It has also spent €540.2mn upfront on acquisitions in 2021, and is due to pay €550mn for Ondura, a provider of roofing membranes based in France. 

While Kingspan’s net debt more than tripled last year – largely as a result of its purchases – its net debt to the Ebitda ratio is still low at 0.88x, and comfortably below its banking covenant of 3.5x.

One topic that is notably absent from Kingspan’s results is the Grenfell Tower tragedy. The company did not design or plan or manufacture the cladding at Grenfell Tower. However, historical issues around the testing and marketing of a certain type of insulation emerged during the Grenfell inquiry. Kingspan has since apologised for the actions of a “small group of employees” at its UK insulation business. 

Management has pledged that the company will pay its share of remediation costs “where [it has] responsibility for the inappropriate use of K15 in a high-rise residential building, and its safe retention cannot be supported by testing.”

What this actually means, however – in terms of money and reputational damage – remains to be seen. At any rate, shareholders seem up to date with events, with the shares changing hands at 27 times FactSet's consensus earnings. Hold. 

Last IC View: Hold, 9,245ȼ,18 Feb 2022