Profits continue to slide at Travis Perkins

Turbulence in the UK’s construction sector has had a material impact on earnings at builders’ merchant Travis Perkins (TPK). Weakness in both the newbuild housing and repairs, maintenance and improvements (RMI) markets led to a 31 per cent decline in the group’s adjusted operating profit in the first half. 

Markets had clearly been anticipating a move like this, as the shares rose 3 per cent on the morning that the company reported its results. It’s likely that investors were relieved that management didn’t further downgrade full-year guidance following an initial reduction in mid-June. 

Higher rates are expected to constrain demand in housebuilding for the remainder of the year – which makes the 9 per cent share price rally the company saw in July look rather hasty. Management is predicting a low-single-digit drop in revenue and mid-single-digit decline in sales volumes across 2023. 

“With volume weaker and price inflation likely to fall, we would not be surprised to hear of some more cost-cutting measures,” wrote Peel Hunt analysts ahead of the half-year figures. In the event, the company referred only to making "additional savings by flexing volume-related costs. Its operating margin fell by 160 basis points in the six months to the end of June due to the impact of lower volumes in its largely fixed cost base.

Elsewhere, the company’s Toolstation business recorded revenue growth of 9 per cent. But more significantly, its operating profit fell 25 per cent year on year.

With the issues plaguing the business unlikely to reach an easy or timely conclusion, Travis Perkins’ full-year price/earnings multiple of nearly 13 times looks steep. Sell. 

Last IC View: Sell, 1,015p, 28 February 2023