Travis Perkins needs to rebuild margins as Toolstation racks up losses

If, as is generally accepted, markets price in a recovery well ahead of one taking place, that would go some way towards explaining why shares in Travis Perkins (TPK) have rallied by around 40 per cent since September last year. Either that, or investors felt the 60 per cent sell-off in its share price in the preceding 12 months had been overdone.

On the basis of its current performance, though, the bounce-back feels a little premature. Although revenue increased by 9 per cent last year to just shy of £5bn, this was largely the result of it raising prices to tackle cost inflation. Prices rose by 15 per cent group-wide, but volumes weakened by 6 per cent.

The drop was most keenly felt in the home improvement market and worsened as the year progressed due to “high levels of material inflation and increasing macroeconomic uncertainty”. The company warned that this is likely to continue throughout 2023. And although activity among housebuilders held up, this was because they focused on building out current schemes, with a slowdown in new starts also set to bite this year. By contrast, both the public sector and the commercial and industrial markets (which make up around 46 per cent of merchanting revenue between them) continue to perform well.

However, the Toolstation business, which targets smaller builders and retail customers and provides around 15 per cent of group revenue, racked up losses. It continued to roll out new stores across the UK and Europe despite weaker sales, and lost £8.9mn on an adjusted basis, compared with a £22mn adjusted operating profit in 2021.

Group-wide operating profit fell by 18 per cent to £285mn. Chief executive Nick Roberts put on a brave face, describing the performance as “resilient”. The fact that he used the same word when discussing prospects for 2023 shows that they’re hardly glowing. The board expects performance to be in line with market expectations, which aren’t too pretty – the FactSet consensus forecast is for a second successive double-digit decline in earnings per share this year. Travis Perkins’ shares currently trade at over 12 times forecast earnings, in line with their five-year average but above the current consensus price target among brokers covering the company.

With the Construction Products Association forecasting a 4.7 per cent decline in the sector this year, this feels a little too pricey for us. Sell.

Last IC View: Sell, 946p, 2 Aug 22

TRAVIS PERKINS (TPK)
ORD PRICE:	1,015p	MARKET VALUE:	£2.2bn
TOUCH:	1,013-1,015p	12-MONTH HIGH:	1,485p	LOW: 708p
DIVIDEND YIELD:	3.8%	PE RATIO:	11
NET ASSET VALUE:	989p*	NET DEBT:	39%

Year to 31 Dec	Turnover (£bn)	Pre-tax profit (£mn)	Earnings per share (p)	Dividend per share (p)
2018	6.74	-49.4	-34.4	47.0
2019	6.96	181	48.9	15.5
2020	3.70	-20.3	-14.3	nil
2021	4.59	306	104	38.0
2022	4.99	245	90.8	39.0
% change	+9	-20	-13	+3
Ex-div:	06 Apr
Payment:	18 May
*Includes intangible assets of £975mn, or 459p a share