Grafton Group slumps on Canaccord downgrade

Grafton Group’s shares dropped on Thursday as Canaccord Genuity cut its rating on the stock to ‘hold’ from ‘buy’ and lowered its target price to 595p from 640p.

The builders merchant on Wednesday reported a 8% rise in first half pre-tax profit to £62.8m as revenue grew 13% to £1.2bn, thanks in part to strong growth in the Netherlands and Ireland. However, the company warned of a challenging backdrop in UK merchanting.

“Grafton has a strong balance sheet and is seeing strong recovery in both sales and margins in Ireland,” Canaccord said.

“However, the group posted a disappointing UK margin performance and the UK macro outlook remains unclear. While Selco (fixed price format business model within UK Merchanting) is performing well in the UK, the planned step up in Selco branch openings will result in an incrementally higher negative profit impact in the near term.”

The broker added that the traditional merchant business models in the UK Merchanting division, mainly Plumbase, are performing less well in a competitive market.

In the near term the broker expects the UK market will remain competitive and the group's organisational restructuring will take time to come through.

However, Canaccord believes over the medium term the group has a “strong position in many of its markets and the shares offer value, assuming it successfully improves the financial performance of its weaker UK businesses”.

In the meantime the share price is expected to remain volatile until the macro outlook into 2017 become clear.

Canaccord reduced its estimates for earnings per share in 2016 and 2017 to 41.8p and 42.4p from an earlier forecast of 44.8p and 47.2p, respectively.

"With earnings now expected to be broadly flat in 2017, we do not see why the group should trade at a premium to sector peers and cut our price target to 595p (from 640p) and downgrade our rating to ‘hold’ (from ‘buy’)."

Shares fell 2.92% to 531.50p at 1024 BST.