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Headlam flatlines ahead of crucial second half

The final quarter of the year is a crucial trading period, but Brexit threatens to complicate things
August 29, 2019

Earlier this year, management at flooring specialist Headlam (HEAD) warned that difficulties in the UK market, along with cost inflation and investments in efficiency initiatives, meant sales would be flat on 2018, and pre-tax profits would be down. Gladly, the first half of the year seems to have gone smoothly, with the gross margin of 32.5 per cent in line with the 2018 comparative and a 2 per cent increase in like-for-like sales. However, challenges could intensify in the second half.

IC TIP: Hold at 423p

Historically, the group’s sales usually trend upwards throughout the year, making the fourth quarter disproportionately important when it comes to full-year performance. This year, the current Brexit deadline of 31 October makes predictions far more difficult. Management has increased inventories in preparation for a hard exit and says there is “no reason why” it shouldn’t meet full-year expectations – but uncertainty means its guidance is heavily caveated.

In the longer term, the group is investing heavily in new capacity, spending £26m on a new distribution centre in Ipswich that will strengthen its operations in the south east, leaving it well positioned for trading with Europe, trade agreement allowing. The site is due to be operational by next Easter.

Broker Investec is forecasting adjusted pre-tax profits of £40m for 2019, giving EPS of 38.5p, down from £43.4m and 42.1p in 2018.

HEADLAM (HEAD)   
ORD PRICE:423pMARKET VALUE:£358.3m
TOUCH:410-423p12-MONTH HIGH:490pLOW: 361p
DIVIDEND YIELD:5.9%PE RATIO:11
NET ASSET VALUE:268p*NET CASH:£32.5m
Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201833716.415.97.55
201934916.015.77.55
% change+3-3-1 
Ex-div:28 Nov   
Payment:2 Jan   
*Includes intangible assets of £50m, or 59p a share