Saturday 24 June 2017

Battered company's salvation lies in the British market

John Mulligan

John Mulligan

JUST like Cavan-based Kingspan -- whose mainstay is insulation panels for offices and homes -- Grafton's reliance on both the construction trade and the relative wealth of consumers has resulted in a pummelling.

With the Irish property market in freefall over the past two years and job losses and higher taxes having forced many DIY-ers to pare back spending, Grafton has been on the receiving end of a thrashing. Its likely salvation lies not at home, but in the UK, which accounts for most of its revenue and profits.

It's not that the British market is currently a bed of roses, but at least it's displaying signs -- "uneven" ones, according to Grafton -- that a recovery is on the horizon.

Recessions aren't necessarily all bad. The downturn here and across the water forced firms such as Grafton to begin rapid cost-cutting exercises, including job cuts.

Grafton's €85m in annualised cost savings doesn't have to go back into the business as it recovers, according to finance director Colm O'Nuallain.

Also, the reduction in working capital requirements and capital expenditure has resulted in the business throwing off cash at a rate that helped it to boost its cash pile to €302m.

Analyst Flor O'Donoghue of Davy Stockbrokers said yesterday that Grafton's underlying profit was "much healthier" than he'd forecast, and that its stock looked undervalued.

It's tougher, though, for Grafton to push its operating margin in the UK back to a level experienced by its peer Travis Perkins, which owns many of its sites and therefore often doesn't have the evil of rent to add to its costs.

Grafton owns about half its sites and half are leased, including many of its Woodies and Atlantic Homecare sites.

But NCB analyst Tommy Conway remains sanguine. He said: "We continue to believe that over the near-term, the UK margins can be rebuilt soonest as the top line stabilises and then recovers and operational gearing kicks in."

Chairman Michael Chadwick noted yesterday that the group was another casualty of upward rent reviews by landlords.

He said the average rent hike being sought has been between 10pc and 20pc.

Irish Independent

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