Headlam Group — Strategy for growth in tougher market

Research: Consumer

Headlam Group — Strategy for growth in tougher market

Headlam Group has laid out an ambitious long-term revenue target of between £900m and £1bn, as it seeks to grow its share of the UK floor coverings distributor market. Despite a challenging backdrop due to the low level of residential housing transactions, management is seeking to expand each of its sales channels: Trade Counters, Larger Customers, Regional Distribution and Europe & Other. The FY23 results reflected the more challenging environment and the group trades at a discount to its long-term average EV/sales multiple for FY24.

Written by

Milo Bussell

Analyst, Consumer and TMT

Consumer

Headlam Group

Strategy for growth in tougher market

Distributors

QuickView

23 April 2024

Price

177p

Market cap

£143m

Share price graph

Share details

Code

HEAD

Listing

LSE

Shares in issue

80.8m

Business description

Headlam Group is a UK-based distributor of floor coverings, operating 68 national and regional businesses across the UK and Continental Europe. In FY23, 88% of revenue was generated in the UK, with 12% in Continental Europe. By customer channel, residential accounted for 65% of FY23 revenue, with commercial making up 35%.

Bull

The company has strong share (c 22%) within the UK floor covering distributor market.

Headlam’s net assets of £220.4m, including a £148.8m freehold property portfolio and £131.5m of inventory, are valued at more than the market capitalisation of the company.

Well-positioned for a recovery in the UK market.

Bear

UK residential housing transactions remain suppressed given the weaker macroeconomic backdrop.

Inflationary pressures remain within the cost base.

The UK floor coverings distributor market is competitive.

Analysts

Milo Bussell

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Headlam Group has laid out an ambitious long-term revenue target of between £900m and £1bn, as it seeks to grow its share of the UK floor coverings distributor market. Despite a challenging backdrop due to the low level of residential housing transactions, management is seeking to expand each of its sales channels: Trade Counters, Larger Customers, Regional Distribution and Europe & Other. The FY23 results reflected the more challenging environment and the group trades at a discount to its long-term average EV/sales multiple for FY24.

Capturing growth opportunities

Headlam is focused on growing its share of the £3bn UK floor coverings distributors market, tapping into segments where it is currently underrepresented, such as Trade Counters and Larger Customers. With a current Trade Counter portfolio of 67, management aims to grow the number of sites to 100 by end-FY25, targeting revenue of £200m in the medium term from £97m in FY23. For Larger Customers, Headlam is adopting a land-and-expand strategy, through winning initial stock-keeping units and subsequently expanding the offering (eg the signing of its first national housebuilder in 2023). Management believes Larger Customers revenue could reach £200m in the medium term, from £83m in FY23. The remaining £500–600m to reach the revenue target would come from growth in Regional Distribution and Europe & Other businesses. With the lowest transactions levels since the global financial crisis, there is significant opportunity for volume recovery.

FY23 results reflect weaker market

The FY23 results, published at the beginning of March, reflected the weaker volumes in the residential home improvement sector that have been echoed by others in the sector. Group revenue fell 1.1% to £657m (FY22: £664m), although the strategic focus on Larger Customers and Trade Counters within the sales mix resulted in revenue growth of 25.6% and 8.5%, respectively. Underlying operating profit fell to £16.1m (FY22: £39.2m), reflecting the weaker volumes and revenue, although this was offset by £10.3m of mitigating actions including price increases and cost efficiencies. The strong balance sheet and confidence in the expected recovery led management to declare a dividend of 10p (FY22: 17.4p), reflecting 1.1x cover.

Valuation: Discount to historical multiples

The share price has had a tough start to 2024, falling 18.1% year-to-date. It is unsurprising, given the weaker volume backdrop, that Headlam’s FY24 EV/sales multiple of 0.3x is at a 35% discount to its long-term average EV/sales.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/22

663.6

37.1

35.2

17.4

5.0

9.8

12/23

656.5

11.0

10.9

10.0

16.2

5.6

12/24e

656.2

7.7

7.2

10.0

24.6

5.6

12/25e

684.4

15.8

14.7

10.6

12.1

6.0

Source: LSEG

EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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