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Home renovations on hold

Earning prospects are bleak at least in the medium term
April 8, 2020

Although it may feel like a lifetime ago, many hailed a 'Boris Bounce' in the housing market following the general election in December. But as coronavirus disrupted the sector, housing transactions have been put on the back burner. Property owners are certainly not rushing to refurbish their homes, and the nationwide lockdown has closed manufacturing sites across the sector.

This could be crippling for companies that were already in a tight spot. Victoria (VCP) was forced to close all of its UK carpet operations, its Italian production facility and its Spanish tiles operations. Broker Peel Hunt has forecast an 84 per cent drop in pre-tax profits in 2021. It is the same tale at Headlam (HEAD): the group closed all of its UK sites, with the exception of the Coleshill depot, which has remained open to service the commercial sector for essential work. Still, Peel Hunt forecast a 17 per cent drop in sales in 2021, assuming a weak economic environment.

But site closures do not spell an inescapable fate: DFS (DFS) has also closed its stores in the UK and Europe, as well as its manufacturing and delivery arm. But the group retains £70m of unutilised immediately available cash resources and an order book of £185m, which it anticipates will translate to £125m of net cash receipts. 

Not all companies in the industry have completely shut up shop. Topps Tiles (TPT) has continued trading as an essential retailer under government guidelines, although it has closed its physical stores to protect its employees and customers. Its closures will inevitably hurt earnings, but the company maintains a relatively healthy balance sheet, as it chipped away at its debt in recent years.  

Still, earnings prospects across the industry are bleak at least in the medium term. The fate of these companies depends on the duration of the lockdown, as well as the economic environment into which we emerge. An uptick in the wider housing market following the current crisis could boost these companies, although we do not think this is likely. For now, good picks in the sector should retain a healthy cash pile or at least manageable debt in order to weather the storm

 

See below for our entire FTSE350 review:

FTSE350 profitability: the direction is clear but not the severity

FTSE350 Review: Coronavirus and the dividend dilemma

FTSE350 groups scramble for cash

Aerospace on the descent as defence stays on course

Banks face capital test

Construction hits the brakes once again

Coronavirus threatens electronics and technology

Engineering and industrials braced for a downturn

Few guarantees for financial services

Food and soap in high demand

Coronavirus slams high street doors shut

Home renovations on hold

Insurers stuck between policies and politics

Miners hold on to their hats in Covid rout

Supermarkets thrive but coronavirus harms other personal goods

Oil companies suffer Covid-19 crunch

Pharma giants entering the testing fray

Property income prospects dimmed by Covid-19

Subscription-based models make for sturdy businesses

Downturn threat obscures outlook for outsourcers

Are telcos still a defensive play?

Coronavirus wrecks UK leisure time

Utilities look resilient amid Covid-19 chaos