Supply chain pressures hamper James Halstead’s margins

Supply chain snarl-ups have been a double-edged sword for flooring company James Halstead (JHD).

In top line terms, they’ve been a benefit. It manufactures in the UK, so has been able to ensure availability at a time when some competitors have found shipping products from overseas both troublesome and expensive.  

Issues around the cost and availability of timber have made wood laminate flooring more expensive, while many commercial occupiers such as schools and hospitals are moving away from using industrial carpets or carpet tiles towards the type of sheet vinyl flooring manufactured by the company.

Indeed, James Halstead has been busy enough to avoid bidding for some high volume work to focus on more profitable lines.

This decision was also driven by the fact that its own raw materials remain both expensive and in short supply, though. As a result, the company has had to spend much more on inventories. Stock levels rose to £83.2mn by year end, up more than £21mn on the prior year.

James Halstead said this increase was due to the higher prices of raw materials, production runs of new ranges and the fact that for the first time in about 18 months it has been able to run machines with fewer disruptions.

“This growth in stock has reduced the cash balances held but offers our business a far greater return than any interest receipts that will be foregone,” chairman Anthony Wild said. Net cash (excluding leases) fell by £5mn to £69.4mn.

 Higher stock levels and the lag between paying higher prices for materials and passing this on to customers has dented margins, though – its operating margin to 18.7 per cent, from over 20 per cent a year earlier. The company continues to face “inflationary pressures not seen in a generation”, chief executive Mark Halstead said.

Raising prices is a “necessary consequence” of this and although it has not yet affected demand – sales in February and March continued to increase – the company is “mindful” that it might, Wild added.

Broker Panmure Gordon nudged its earnings forecast for this year down by 1 per cent to 9.7p a share, citing margin pressures caused by pricing lags. In light of this backdrop and the fact that James Halstead’s shares seem fairly priced at 24-times earnings, in line with their five-year average, we stick to hold.

Last IC View: Hold, 4 Oct 2021