FTSE 350: Builders’ merchants face tougher trading

Consumer confidence is also a significant influencing factor, notably in the repair, maintenance and improvement (RMI) sector. And while some repairs, such as a new gas boiler or shower unit are generally regarded as being non-discretionary, consumers continue to sit on their hands when it comes to the new patio or side extension. This not only reflects worries about how Brexit could affect the employment market, but also because inflation continues to outpace the rise in average earnings. Builders’ merchants are also being faced with increased price competition in the face of sluggish growth in the RMI sector.

However, there are some bright spots. Those companies with an exposure to social housing construction look set to benefit from the government’s efforts to provide more affordable homes. Housebuilders are also providing good work for materials providers, having recently posted the 16th consecutive monthly rise in output. There is also an appetite among developers for the continued conversion of offices into residential units – again good news for materials providers.

There are headwinds to consider, most notably the increase in raw material prices. Those companies with a strong market position have had little trouble passing these on, but for some there has been a time lag before these cost increases have been recovered. Inevitably, margins have suffered as a result, with Ferguson (FERG) reporting lower margins as customers rejected supplier price rises.

For brick suppliers, expanding house construction is providing solid support, while sterling’s decline helped to restrict brick imports. These are expected to fall further as new plants are brought online. Ibstock (IBST), for example, recently opened a new factory that will push out 100m bricks per year, adding 5 per cent to UK total brick capacity by 2019.

So, in the year ahead, companies that should expect to see the greatest growth levels will be those with a decent exposure to the housebuilders and infrastructure schemes, while the builders’ merchants will experience relatively lower rates of growth.