James Halstead PLC (LON: JHD) – Consistently solid demand brings confidence for H1 FY2021

James Halstead PLC is an FTSE AIM All-Share Index listed Company founded in 1914 and headquartered in Manchester, the United Kingdom. The Company manufactures and supplies flooring products for both domestic as well as commercial purposes. Geographically, it operates in the United Kingdom, the European Union, Scandinavia, Australasia, and the Rest of the World. JHD’s portfolio of brands includes Polyflor. It has several subsidiaries such as Polyflor Ltd, Polyflor Australia Pty Ltd, Polyflor Canada Inc., Polyflor New Zealand Ltd, Riverside Flooring Ltd, Karndean International GmbH, Fack Design AB, etc. JHD strives to achieve repeat business by always focussing on enhancing goodwill and customer satisfaction. The Company has dedicated salespeople to deliver products to end-users. For regional and local delivery, JHD has supplied in bulk to distributors. The Company continuously invests in process improvement and product development.

Recent Trend of dividend payments – JHD declared an interim dividend of GBX 4.25 per share for H1 FY2021 on 31 May 2021 with an ex-dividend date of 6 May 2021. Previously, the Company had paid a final dividend of GBX 10.00 per share for FY2020. 

Growth Prospects and Risk Assessment

• Diversity of Projects: The Company is involved in a diverse range of projects. It supplied flooring to the Serum Institute of India in Pune for expansion of production of the Astra Zeneca vaccine. It also has projects such as Enigma Museum in Poznan.
• Consistent & Sustainable Demand: The Company has always maintained solid demand even in the face of the pandemic. It got recent projects like the new Macau Wholesale Market and the Van der Valk hotels in the Netherlands.
• Strategy to enhance brand identity: JHD always has plans to generate repeat business. Hence, it always tries to enhance brand identity and increase goodwill and customer satisfaction. It would continue to increase revenue in future.
• Dedicated sales personnel to end-users: By having dedicated sales personnel to end-users, JHD reduces costs and also enhances customer experience.
• Continual Investment in Process Improvement and Product Development: By continually investing in process improvement and product development, JHD improves both output efficiency and product offering.

Key Risks 

• Confusion among freight forwarders and border control: This could lead to supply disruptions and delays, which would cause higher costs and lower revenues.
• The issue with EU sourced goods: This is a challenging situation as EU sourced re-exported goods attract import duty, increasing costs.
• Disruption in many regions: The Company operates in a global economy, and hence, there are disruption challenges in many regions due to Covid-19.
• Financial Risk: JHD is also exposed to financial risk associated with foreign exchange rates and interest rates movements. Also, there is a risk of changes in the fair value of its financial assets and liabilities with the economic downturn.
• Shortage of basic raw materials: Shortage of raw materials could disrupt production and hence, increases the cost of production. 

After understanding growth prospects and risk assessments, we will analyze some key fundamental and shareholders statistics of James Halstead PLC.

Financial and Operational Highlights (for the six months ended 31 December 2021 as of 31 March 2021)

(Source: LSE Website)

• JHD achieved record sales in H1 FY2021 despite a difficult macroeconomic environment. Sales were £130.45 million, similar to the H1 FY2020 level of £130.39 million.
• Sales in the UK were up 2.2% YoY in H1 FY2021, sales across Europe were down 1%, in Australasia, sales rose 2%, but in the rest of the world, sales declined 8%.
• Revenue increase and cost control measures led to operating profit up ~3.9% YoY to £126.32 million.
• Profit before tax also achieved an unprecedented level in H1 FY2021. It was up ~3.3% YoY to £26 million.
• JHD managed a high cash accretive operation in H1 FY2021. Cash inflow from operations rose to £39.85 million in H1 FY2021 from £28.37 million in H1 FY2020.
• This led to a net increase in cash and cash equivalents of £7 million in H1 FY2021.
• JHD’s liquidity position surged significantly with cash and cash equivalents rose ~15.7% YoY to £74.45 million in H1 FY2021.
• Due to this solid liquidity position, JHD declared an interim dividend of GBX 4.25 on 31 March 2021, which is the total of last year’s two interim dividends.

Financial Ratios (H1 FY21)

Share Price Performance Analysis

(Research done by Kalkine Group)

On 1 June 2021, at 8:40 AM GMT, JHD’s shares were trading at GBX 497.90, down by 0.40% against the previous day closing price. Stock 52-week High and Low were GBX 538.00 and GBX 426.00, respectively.

On a daily chart, JHD's price is trading above an upward sloping trend line for more than a year and currently trading around the trend support level GBX 490, indicating the probability of an upside reversal. On the weekly chart. The momentum indicator RSI (14-period) is trading in positive territory at ~49 levels. The trend-following indicator 21-period SMA and 50-period SMA sustaining around the current market price and supporting a positive direction for the stock.

In the last five years, JHD’s stock price has delivered a decent positive return of ~21.66%. However, and it has underperformed the FTSE All-Share Construction and Materials index with a return of around  60.16% and the FTSE AIM All-Share index with a return of about 70.39%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Peers used in the valuation methodology (Price/NTM Earnings) 

Business Outlook Scenario

JHD has delivered a decent result for H1 FY2021 with record sales. Profit before tax also achieved an unprecedented level in H1 FY2021. There are new projects which provide further confidence for H2 FY2021 and beyond. The Company has a diversity of projects, consistently solid demand, strategy to enhance brand identity, dedicated sales personnel to end-users and continual investment in process improvement and product development going into H2 FY2021. JHD has very low leverage, with a debt/equity ratio of 0.06x, indicating financial flexibility to raise further debt, if required, at a cheaper cost. It will help JHD to significantly invest in its new projects, product development, brand identity enhancement and customer satisfaction. The management also strives to continue its key performance across turnover, profit before tax and cash generation.

The board expects future production will be able to fulfil all confirmed orders. On the technical chart, the next important support level is at GBX 426.00.

Considering the decent prospects of the Company, its solid demand, its brand identity and customer satisfaction, decent profitability and leverage profile of the business, its continual process improvement, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on James Halstead Plc at the current price of GBX 497.90 (as on 1 June 2021 at 8:40 AM GMT), with lower-double digit upside potential based on 30.67x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV

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