James Latham ups dividend, but will profits keep growing?

Although a gradual softening in wood prices meant earnings for Aim-traded timber merchant James Latham (LTHM) were not as stellar in its 2023 financial year as they were a year earlier, its performance was still described as “excellent” by chairman Nick Latham.

Timber prices for the domestic market ended the year around 10 per cent off their August 2022 peak, but were up 6.5 per cent over the course of the year for James Latham. They also remain about 40 per cent higher than pre-pandemic levels, according to the Office for National Statistics.

Elevated prices over the past couple of years were the result of a confluence of factors, including heightened post-pandemic demand, supply chain challenges and higher energy costs. These have started to unwind, though, and a “more competitive marketplace” led to a trimming of James  Latham's gross margin to 19.6 per cent, from 23.8 per cent a year earlier. 

Sales volumes held up and the company isn’t expecting a dramatic fall in prices as its suppliers are still grappling with higher materials, labour and energy costs. However, some customers have shifted to cheaper products and the company expressed concern that a “quiet” market in Europe could lead to some manufacturers shifting excess stock to the UK. 

Still, after a strong year of cash generation – helped by a reduction in inventory as supply strains eased – the board remained confident enough to up its dividend and to offer a special 8p dividend for the second year in a row. 

Nick Latham recognised the company now faces the tricky task of transitioning from a period of “exceptional” profits to a market where inflationary pressures could dampen demand. 

This, and the lack of independent analyst research on the stock, make assessing a valuation based on future earnings troublesome. A bid-offer spread wide enough to drive a truck through is also offputting, as if things turn for the worse achieving a sale at a fair price could prove difficult.

And with concerns about rising mortgage rates acting as a brake on new housing development – the Construction Products Association forecasts a 17 per cent decline in output in the private housing market this year – earnings risk looks skewed to the downside.

Therefore, even though a valuation of just seven times trailing earnings for a company that has plenty of cash available looks undemanding, we remain on the fence. Hold.

Last IC View: Hold, 1,215p, 1 Dec 2022