Genuit boosted by the housing boom

Earnings for plastic piping producer Genuit (GEN) have pumped up thanks to the residential housing boom. Sales in its residential business were up to £183.8m in the first half of 2021, a 63.7 per cent like-for-like increase compared to 2020 and 17.8 per cent up on 2019. The only fly in the ointment for Genuit is rising input cost pressures. However, so far it has been quite successful at passing this inflation onto consumers and management is confident this can continue in the second half of the year.

Overall, the group's underlying operating profit rose 23.7 per cent on 2019. This left it with an underlying operating margin of 16.4 per cent, which was 120 basis points lower than two years ago. This margin slip came from “structural labour supply constraints and cost inflation” causing an increase in raw material and transport costs. Management has seen a slight easing of supply constraints as the self-isolation rules are relaxed but see driver shortages as an issue that could linger.

To counter this increase in overheads, Genuit has boosted prices by around 8 per cent, which analysts at Peel Hunt see as a sign of "the group’s strong brand and market positions”. If the brokerage is correct then this should pave the way for continued price rises in H2.

The commercial and infrastructure division performed a little slower than residential, with only 8.3 per cent like-for-like increase in sales against 2019. Infrastructure projects, such as road construction, showed resilience as open air projects were able to continue. But the shift to home working and online shopping kept the demand for commercial work subdued. Here, the company expects new build activity to stay below 2019 level for the next two years, but remains bullish about the prospects for infrastructure, partly thanks to its HS2 contract.

Peel Hunt expects consensus underlying profit to increase by around 9 per cent thanks to Genuit’s strong residential market and the performance of its recent acquisitions. The company made three purchases during the period, including Adey, a provider of magnetic filters for water based heating systems. Adey has performed better than expected and will contribute to its low carbon heating offering.

Shares are currently trading at 21.2 times forward earnings, according to Factset consensus. This is a little expensive but not crazy and the ongoing demand for housing, coupled with the group's ability to pass costs onto customers, stands it in good stead. Buy.

Last IC View: Hold, 578p, 16 March 2021