James Latham builds gross margin despite Russia sanctions

Energy prices have been rising steeply due to the war In Ukraine, but it doesn’t end there. In response to Russia's invasion, the European Union and the UK banned timber imports from the country as part of their sanction measures. Since then, builders, contractors and manufacturers have been struggling to source suitable timber, as prices were driven up rapidly across Europe.

Nick Latham, chairman of timber trade distributor, James Latham (LTHM), would undoubtedly have been pleased with an ^{11.9 per cent in like-for-like trading volumes in the year to March, but cautioned that “there are still a few notable challenges, including obtaining alternative supplies to replace products that previously were sourced from Russia”.}

You get some idea of the severity of the problem by the 36.2 per cent hike in the cost price of the trade distributor’s products. Whenever we witness rising inputs on this scale, the question centres on cost pass-through. James Latham doesn’t appear to have any problems on this score, driving up its gross margin by 5.8 percentage points to 23.8 per cent from the prior year. Warehousing represents a substantive component on the cost front, and is doubly significant given that six of the company’s depots are working 24 hours a day.

Predictably, inventory levels increased to £74.2m from £48.2m last time around. You would imagine this might have been partly driven by the industry-wide shift towards resilience in the supply chain, although the company said that it was mainly due to increases in prices for its products and extended lead times for imports. The figure was also bumped up by inventory in its new business, Northern Ireland-based IJK Timber. Receivables were also on the rise through the year, mainly a reflection of the surge in revenues, as the company also noted an improvement on debtor days from the previous year.

Trading volumes and margins have remained elevated through the early part of its current financial year, although management is starting to see weakening cost prices in some of the major product groups, possibly linked to alternate timber sources entering the European market.

Overall, a strong showing and one that management felt justified an 8p return to shareholders as part of the improved final dividend of 27p (15.5p in 2021). Though the premium to NAV has contracted appreciably from FY 2021, James Latham is faced by a deteriorating macroeconomic background that threatens to partly undermine the significant recovery made by the company since the pandemic disruptions. We, therefore, remain circumspect. Hold.

Last IC View: Hold, 1,278p, 25 Nov 2021