Solid rea­sons why Head­lam still looks at­trac­tive de­spite re­cent profit warn­ing

Con­ti­nen­tal Europe is a medium-term cat­a­lyst for the car­pets, lam­i­nate and com­mer­cial floor­ing spe­cial­ist

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Don’t be put off by a re­cent profit warn­ing from floor cov­er­ings dis­trib­u­tor Head­lam (HEAD) as the busi­ness still has at­trac­tive qual­i­ties. Stock­bro­ker Pan­mure Gordon ar­gues the Euro­pean op­er­a­tion, ‘men­tally writ­ten off’ by many in­vestors, is likely to pro­vide ‘a strong pos­i­tive cat­a­lyst for im­proved in­vestor sen­ti­ment’.

Europe re­mains small at 15% of group rev­enue and gen­er­ated EBIT (earn­ings be­fore in­ter­est and tax) mar­gins of 1.1% in the six months to 30 June 2018 ver­sus 6.6% for the UK, yet the unit is see­ing strength in the res­i­den­tial sec­tor and the Con­ti­nen­tal Euro­pean mar­ket is ripe for con­sol­i­da­tion.

Head­lam’s man­age­ment has scope to raise the op­er­a­tion’s re­turn on sales to­wards that of the core UK busi­ness, which ac­counts for the re­main­ing 85% of group rev­enue.

Along­side first half re­sults (22 Aug), Head­lam, an or­ganic and ac­quis­i­tive mar­ket share gains story, warned full year prof­its will be ‘to­wards the lower end of cur­rent mar­ket ex­pec­ta­tions’ due to per­sis­tent soft­ness in the UK floor cov­er­ings mar­ket, although point­edly, prof­its will still be ahead of 2017.

Pan­mure Gordon forecasts full year pre-tax profit of £43.5m (2017: £43.1m) and a flat 24.8p div­i­dend, mean­ing in­vestors are be­ing paid a 5.4% div­i­dend yield to wait for the UK to sta­bilise and Euro­pean up­side to come through. (JC)

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