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
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)