Grafton Group PLC

Grafton Group PLC (GFTU) is a Dublin, Ireland-headquartered company which is predominantly a United Kingdom and Ireland based distributor of building materials with new operations in the Netherlands and Belgium, along with mortar manufacturing market in Britain and DIY retailing market in Ireland. The group has a strong portfolio of businesses and brands, with strong regional and national market positions in its markets. The operations of the group are differentiated in three core operating segments, namely Manufacturing, Retailing and Merchanting, which is further divided into the UK, Ireland and Netherlands.

Financial Highlights (H1 FY 2019, in £m)

(Source: Company Filings)

Reflecting volume and price growth of 3.0 per cent in the like-for-like business, which increased revenue by £41.1 million, group revenue increased by 2.5 per cent (2.7 per cent in constant currency) to £1.44 billion (H1 2018: £1.40 billion), while revenue including discontinued operations was £1.48 billion. Due to growth in the retailing business in Ireland and in the like-for-like merchanting operations in the UK, Ireland and the Netherlands, adjusted operating profit from continuing operations increased by 5.8 per cent to £97.7 million (H1 2018: £92.4 million) on pre-IFRS 16 basis, while adjusted operating profit including discontinued operations was £98.1 million. Statutory operating profit rose by 6 per cent to £95.1 million on pre-IFRS 16 basis, while operating profit before property profit rose by 5.7 per cent to £93.0 million (H1 2018: £88.0 million) on pre-IFRS 16 basis, which corresponded to adjusted operating profit margin (excluding property profit) of 6.5 per cent, which reflected an increase of 20 basis points. Due to a positive operating margin outcome in the merchanting businesses, adjusted operating profit margin rose by 20 basis points to 6.8 per cent. Adjusted profit before tax reported a growth of 5 per cent to post £94.3 million, on pre-IFRS 16 basis, while adjusted basic earnings per share rose by 6 per cent to 32.6 pence. Statutory profit before tax was ahead by 5 per cent to £91.6 million, on pre-IFRS 16 basis, while basic earnings per share rose by 6 per cent to 31.7 pence.

Valuation Methodology
Method:  Price/Earnings Approach (NTM)


Share Price Commentary

Daily Chart as at 30-August-19, before the market closed (Source: Thomson Reuters)
 
On 30 August 2019, at the time of writing (before the market closed, GMT 1:03 PM), GFTU shares were trading at GBX 732.50, up by 7.32 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 938.50/GBX 626.50. The company's stock beta was 0.62, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £1.62 billion, with a dividend yield of 2.64%.

Conclusion
The company continues to benefit from the market position of Selco in the United Kingdom, despite the uncertainty in the country leading to continuing volume and pricing pressure, and the group continues to focus on self-help initiatives. The group expects continued growth in its strongly positioned merchanting and DIY businesses in Ireland, and though some moderation is expected following the strong performance of recent years, the outlook for the Irish economy remained positive. While the group is wary of short-term disruption from global political and economic uncertainties, its future growth plans are supported by a strong balance sheet.

Based on the healthy prospects and supported by valuation done using the above method, we have given a "BUY" recommendation at the closing price of GBX 682.50 (as on 29 August 2019), with lower double digit upside potential, based on 11.64x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 
*Peers of the company are Taylor Wimpey PLC, Travis Perkins PLC, SIG PLC, Ferguson PLC and Howden Joinery Group PLC
*All forecasted figures and Peers have been taken from Thomson Reuters.
*The Buy recommendation is also valid at the current price as on 30-August-19.

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