GCILords Group resilient amid market challenges: H1 highlights strong gross margin and £2.6m cost savings
I am often asked what investors should look for when picking stocks. To me, top of the list are secular growth, hungry/passionate management, a durable business model, and an attractive valuation.
Specialist builders merchant and heating/plumbing products distributor () possesses all four.
Indeed, today the company posted creditable H1'24 numbers against a "challenging" backdrop for the UK housebuilding and RMI market - maintaining gross margins at 20.2% (20.4% H1'23) and cutting overheads (£2.6m pa) whilst equally delivering £12.6m and 1.6p of adjusted EBITDA and EPS respectively, despite suffering a -6.1% contraction in LFL revenues to £214.2m.
Elsewhere, net debt (pre IFRS) closed June at £36.3m (excl £7m deferred consideration) vs £28.5m in Dec'23, due largely to boiler inventory build ahead of the peak winter selling season. Most of this should unwind in H2, with house broker Cavendish pencilling in Dec'24 net debt of £30.8m, representing net debt to EBITDA (pre IFRS 16) and interest cover of approx. 2.2x and 2.9x - underpinned by £75m of committed bank facilities until April 2027 and £13m of freehold property.
This resilience is a hallmark of Lords, alongside its entrepreneurial and customer-first culture, which have together powered the group through even the deepest of recessions since CEO Shanker Patel (32.5% stake) joined the firm as a student way back in 1993.
What's more, the industry now seems to have reached a tipping point. Why?
Well, after the recent disruption caused by the early general election, wet weather and deferral of the government's Clean Heat Market Mechanism (re Boiler Tax), there are now several tailwinds that should drive growth in 2025 and beyond.
Not least the Labour government's plans to lift new home construction to 300k pa, up c. 40% vs 2023. Better still, property prices and construction PMIs are both climbing, input cost inflation has moderated, interest rates are falling, and all the national housebuilders are citing improved conditions by the end of the year.
Plus, there's literally millions of properties that need upgrading and decarbonising, which plays perfectly into Lords' strengths in RMI and energy efficient products such as Air Source Heat Pumps (+492% in H1'24).
So, putting all this together, Lords (mrkcap £68m at 41p) - which trades on a FY25 PE multiple of 11.7x (vs rival Travis Perkins at 13.9x) - appears to be an attractive recovery stock for risk tolerance investors with a 3-5 year view. Particularly as the Board remains committed to its medium-term EBTIDA margin targets of 7.5% vs 5.9% in H1'24.
CEO Shanker Patel commenting: "In this challenging market, management has remained focused on optimising capital allocation and operating efficiency, with actions taken on costs expected to deliver annualised overhead savings of £2.6m in FY25.
Whilst the outlook for the Construction sector is beginning to improve, the Board is not expecting any change to trading conditions in H2’24 and expect that Adjusted EBITDA will broadly be in line with management expectations."
Lastly, Cavendish has a 106p/share target price based on FY24 revenue, adjusted EBITDA (post IRFS) and EPS forecasts of £450m, £23.8m and 2.7p - climbing to £465m, £25.0m and 3.5p in 2025 - to me, leaving scope for upgrades next year, particularly if the government delivers anywhere near its new build targets.
Time to be patient.
Follow News & Updates from Lords:
Disclaimer & Declaration of Interest
The information, investment views and recommendations in this article are provided for general information purposes only. Nothing in this article should be construed as a solicitation to buy or sell any financial product relating to any companies under discussion or to engage in or refrain from doing so or engaging in any other transaction. Any opinions or comments are made to the best of the knowledge and belief of the writer but no responsibility is accepted for actions based on such opinions or comments. Vox Markets may receive payment from companies mentioned for enhanced profiling or publication presence. The writer may or may not hold investments in the companies under discussion.