A decline in the gross margin spoiled an otherwise solid set of interims from kitchens supplier, Howden Joinery Group PLC (LON:HWDN).
Group revenue rose to £619.4mln in the first half of 2018 from £553mln in the corresponding period of 2017.
READ: Howden Joinery shares rise as revenue jumps in first part of 2018
Profit before tax moved up to £68.8m from £65.6mln but the market took fright at the decline in the gross profit margin to 61.3% from 64.1% in the same period of 2017.
Earnings per share rose to 8.9p from 8.4p the year before while the dividend was edged up to 3.7p from 3.6p the previous year.
New CEO says business is in good shape
“We delivered a solid performance in the first half, as we press ahead in a competitive market,” said Andrew Livingston, who became the chief executive officer of Howden in April of this year.
“Our investment programme in manufacturing, distribution, depot roll-out and IT remains on track,” he added.
"Howdens is in good shape with opportunities ahead of us, as we develop our product offering, bring even more convenience to the building trade and generate further operational efficiencies across the business," Livingston concluded.
Howden Joinery UK depot revenue increased by 5.3% in the first four week period of the second half of the year (to 14 July 2018).
Brokers generally impressed with solid performance in a tough market
Numis said it was an impressive result from Howden although the broker has trimmed its full-year forecasts to take into account foreign exchange headwinds and moved its recommendation to 'hold' from 'add', following a recent good run by the shares.
“H1 PBT [first half profit before tax] of £68.8mln was slightly ahead of NSe [Numis] £67m (and +5% on last year). Management points to unchanged expectations for the full year, but we trim our PBT estimate for this and next year by £3m/1% to factor in the £/€ headwind impact on gross profit,” Numis said.
Its price target remains unchanged at 512p.
Liberum remains a buyer of the stock and has a target price of 557p, saying the shares still look good value on a projected price/earnings ratio of 15 based on Liberum's earnings estimates for 2019), given the company's long-term growth record and ability to generate cash to return to shareholders.
“Howden’s interims have surprised on sales, up 12%, with UK l-f-l +10.7%, but the slippage expected on gross margin has been a bit more than we or consensus expected, so profits are only a little ahead of consensus, but behind our more optimistic forecast,” the broker noted.
“The gross margin has slipped as depots have been allowed more flexibility and due to the timing of price rises. We expect consensus estimates for profits to remain unchanged with more sales, but lower margins. We think that Howden's strategy is appropriate and will allow it to sustain further market share gains in future as the branch roll out story continues,” Liberum added.
Shares in Howden were down 5.2% at 487.1p.