Headlam Group PLC (LON:HEAD) shares dropped in mid-morning trading Wednesday after the flooring firm issued a profit warning for the 2019 fiscal year.
In a full year trading update, the group said it expected its results for 2018 to be “marginally ahead” of 2017 and in line with market expectations with around £708.7mln in revenues and underlying pre-tax profits of £43.6mln.
READ: Rug pulled from under Headlam shares as Peel Hunt downgrades its rating to ‘hold’ from ‘buy’
Headlam also said its final dividend would be in line with expectations at around 24.88p, resulting in the total dividend being “a very slight increase” on 2017.
However, the company said that due to expected ongoing weakness in the UK market, as well as inflationary pressures on distribution costs and administrative expenses, it expected underlying pre-tax profits for 2019 to be lower than 2018 in the range of £39mln-£41mln while revenues would be flat.
Despite the lower forecasts, Headlam said it intended to maintain the 2019 dividend at 2018 levels to reflect the confidence in its ability to improve profitability as well as the maintenance of a strong balance sheet and cash generation.
The firm’s net cash at the end of 2018 was expected to be higher than the £35mln for 2017.
The company also said it had invested in additional inventory in anticipation of Brexit later in the year and that its warehousing network and inventory positions should help mitigate any potential disruption.
Steve Wilson, Headlam's chief executive, said the firm was taking “a prudent view” given the “anticipation of further weakening in markets due to the wider economic environment”.
“Our intention to maintain the dividend for 2019 despite this backdrop is testament to our belief in the strength of the business. We are focused on expediting the efficiency initiatives to improve our performance going forward, irrespective of any weaker trading conditions and remain committed to providing improving returns to shareholders."
READ: Headlam Group slides as it downgrades full year expectations following drop in first half sales
The profit warning may be giving some shareholders déjà vu after a drop in first half sales for 2018 led the firm to issue a similar warning in August.
Broker cuts target price saying it was “not cautious enough” in previous downgrades
In a note to clients, analysts at broker Peel Hunt cut their target price for Headlam to 400p from 460p, saying that a 9% downgrade to their forecasts pre-Christmas was “clearly not cautious enough”.
“We had already incorporated the sales performance, but costs are running higher than we expected and cost reduction initiatives slower than we had thought. As a result, we are downgrading forecasts by a further 7%.”
The broker said in light of the update it had moved its forecasts to the bottom end of the firm’s predicted profit range at £39mln given “uncertainty over trading”.
Headlam shares were down 1.6% at 393.5p.