Lords Trading Group lowers expectations

A week or so after Lords Group Trading (LORD) announced the purchase of Alloway Timber and Builders Merchants Ltd in southwest London, the building supplies merchant said that the slowing business volumes experienced during the second quarter are likely to persist through the remainder of the year. A combination of elevated interest rates, inflation, and faltering consumer confidence have weighed on demand levels, so the group has downgraded full-year expectations to around £450mn in revenue and £27mn in cash profits.

The market wasn’t best pleased with the revision and shares were subject to a double-digit dip on results day. Yet the underlying results for the half-year provide some cause for encouragement, with cash profit up by 6 per cent to £15.1mn on a 20-basis point increase in the underlying margin to 6.8 per cent.

The group’s working capital and cashflows were negatively impacted by “historical industry wide boiler supply issues”, which hampered financial performance at the P&H division. This wider issue has been resolved, so the division’s working capital profile is expected to normalise back to cash over the coming months. Investors would be well advised to monitor the leverage ratio, which expanded to 1.9 times from 1.6 at the year-end

By most measures, Lords continues to trump market peers, although it could be argued that relative outperformance provides cold comfort in view of a material downgrade. Forecasts from Stifel point to an adjusted PE ratio of 11 times for the full-year and a negative free cashflow yield of 0.4 per cent. Given the macro backdrop it would be unrealistic to imagine that the building supplies market will recover before the second half of 2024. Hold.

Last IC view: Hold, 72p, 03 May 2023