Poorer profits no barrier to Grafton’s giveaways

Generally, if a chief executive’s key highlight in a results announcement is the amount of cash it has handed back to investors, things haven’t been going swimmingly. 

So it proved with builders’ merchant Grafton (GFTU), whose chief talking points were a “resilient” performance and the return of £133mn to shareholders – £50mn or so through dividends and the rest through share buybacks.

Revenue eked up by 3 per cent to £1.19bn, but this was largely the result of currency movement – organic growth was flat and volumes were lower. Management argued this was to be expected, given a partial reversal in steel and timber prices. 

Operating profit fell by a third to £94.3mn, although the company highlighted an adjusted figure that stripped out a prior-year property sale, which was still down by a fifth.

Profit halved at the UK distribution arm containing builders' merchant Selco, due to the ongoing weakness in the UK home improvement market.

Grafton chief Eric Born argued that when compared with the corresponding pre-pandemic period, Grafton looks in much better shape. Most of its revenue is now earned outside the UK, its adjusted operating profit is healthier and it has a much stronger balance sheet, with net cash of £3.7mn, compared with net debt of £540mn in 2019.

That may be so, but 'we’re better than we were' hardly makes for a compelling investment case – even when sweetened by the announcement of a further £50mn of buybacks. 

The shares are valued at 12.6 times broker Peel Hunt’s forecast earnings, below their five-year average of 13.4 times but not by much. And if the slump in the home improvement market drags into the first half of next year, as expected, we think a re-rating is unlikely. Hold. 

Last IC View: Hold, 939p,3 Mar 2023