Inflation hits Howden as overseas sales rise

Howden Joinery’s (HWDN) pre-tax profit sank by over a fifth in the six months to June, but the equity market liked what it saw elsewhere in the half-year results: the kitchen retailer’s share price was up over 4 per cent on the day to a near-52-week high.

One bull point that may have excited investors was Howden’s international sales figures, which leapt by over a third and helped pull up overall revenue by 1.5 per cent at a time when UK revenue increased by just 0.6 per cent. The numbers suggest that its overseas depots could be a reliable source of future growth for the company. On average, Howdens made £2.1mn per international depot compared with £1.1mn per UK depot. Different depots come in different sizes, but the difference nevertheless highlights the success of its expansion strategy.

It hasn’t been cheap, though. Where the company has traditionally traded from a net cash position, it currently has a net debt-to-equity ratio of 66.6 per cent due to the additional leases it has had to take on. Meanwhile, a combination of inflationary costs, capital expenditure – presumably linked with the expansion – as well as tax, dividends and “interest and principal paid on lease liabilities”, have depleted its cash.

The rating of 14 times forward earnings is a little rich from an historical perspective, but it comes with a forward dividend yield of around 3 per cent despite the annual share price performance. The short- and medium-term moving averages are beginning to coalesce, pointing to potential weakness in the share price going forward. It could be argued that the rating is hard to justify given the expected rate of growth, at least over the coming year. Yet the share price is still 10 per cent adrift of the consensus target and there are signs that’s Howden’s business model is far more resilient than intuition might suggest. Long-term buy.

Last IC view: Buy,  717p, 23 Feb 2023