James Latham's customers go for cheaper cuts

A 10 per cent decline in James Latham’s (LTHM) top-line was to be expected given the fall-off in timber prices. The price of sawn and planed wood dropped by 9 per cent in the 12 months to October but is still up by around a third over a three-year period, according to the Office for National Statistics.

Chairman Nick Latham said the timber merchant had managed to maintain sales volumes during the half-year but added that some customers had traded down to cheaper products given the inflation experienced in the market in recent times.

As a result, its gross margin fell from 19.4 per cent a year ago to 16.8 per cent, which is also below its long-run trend of 17.5 per cent.

Although it kept a firm grip on costs, with overheads lower than the prior year period, operating profit fell by 38 per cent to £14.5mn, which Latham said was expected after the “exceptional” results it had enjoyed over the past two years.

A stabilisation in supply chains also allowed the company to sell off some inventory, which provided a boost to its cash position. Net cash (excluding leases) stood at £66mn at the period end, up £30mn. Given that its pension scheme is now fully funded, meaning catch-up payments of £3mn a year will no longer need to be made as of next month, the company could comfortably afford to increase its dividend by 7 per cent.

With the company’s shares having fallen in value by 18 per cent since the start of the year, they now offer a dividend yield of around 3.5 per cent. They currently trade at 11-times house broker SP Angel’s forecast earnings, in line with their five-year average.

However, the outlook for the company doesn’t look too promising. The market in continental Europe is “quiet”, and although that’s only a small portion of its sales, it means European providers are keener to move onto its turf, placing pressure on pricing.

The Construction Products Association forecasts a slight (-0.3 per cent) contraction for the sector next year and SP Angel sees Latham’s earnings weakening by a further 1 per cent in its next financial year. Therefore, while it's generally wise to get in ahead of a recovery, we think that in James Latham’s case there’s a while to wait yet. Hold.

Last IC view: Hold, 1,203p, 29 Jun 2023