Latham’s performance is more wooden

Things look much more sedate for timber merchant James Latham (LTHM) following a stellar 2021 when it made chunky margins on the back of runaway wood prices. 

Sales still rose by 10 per cent, but the momentum in timber pricing has eased and volumes have been flat. With energy, transport and other costs still rising, this has placed pressure on profits. 

Although margins remain above 10-year averages, they have come down, with operating profit a third lower at £23.5mn.

Cash flow from operations more than doubled to £11.7mn, with the company having to spend less on building up inventory. The amount of stock it holds remains at elevated levels, though, as the company guards against supply chain inflation.

The outlook doesn’t exactly look rosy. Second half volumes and margins have both weakened slightly and sales to merchants are “quieter”, chairman Nick Latham said, although order books elsewhere remain stable. 

The Builders’ Merchants Federation reported an 11.1 per cent fall in timber and joinery sales during the third quarter, and its chief executive John Newcomb expects both commercial and retail customers will “feel the squeeze of rising prices, interest and taxes” following the recent Autumn Statement.

“This will undoubtedly feed into the next 12 months,” he argued.

Given the economic backdrop, the 2.3 per cent decline in Latham's year-to-date share price looks pretty respectable when compared with the fact that fellow timber merchant Howdens Joinery (HWDN) has seen its valuation cut by a third. 

Yet the relative lack of movement could be the result of inertia as opposed to enthusiasm. With forecasts for both the housebuilding and home improvement markets looking grim – the Construction Products Association anticipate a 9 per cent decline for both next year –  it’s hard to drum up a convincing growth case. However, at 1,250p, the shares are priced at just 6.6 times its trailing 12-month earnings and it’s hard to argue that a business still making a double-digit margin is significantly overvalued.

Indeed, a bid-offer spread of 100p on the day the results were announced indicates traders were unwilling to take a directional punt – either that, or with almost 20 per cent of the 19.9mn shares remaining in family hands, they deemed taking a short position to be an unnecessary risk.

Latham's shares could prove to be a recovery play for a buy-and-hold investor, but given the returns available on cash the payoff could take so long that it might not be worth waiting for. Hold.

Last IC View: Hold, 1,404p, 29 June 2022