Howden Joinery Group shares fall on Berenberg downgrade

Howden Joinery Group shares dropped on Tuesday as Berenberg lowered its recommendation on the stock to ‘hold’ from ‘buy’ and cut the target price to 450p from 550p.

Berenberg said the supplier of kitchens and joinery products is seemingly one of the most exposed companies in its UK mid-cap coverage to an economic slowdown in the UK.

In its kitchens business, Howden sells one-off, big-ticket items for which demand is driven by consumer confidence, disposable income and a desire to invest in housing stock.

Recent data on UK repair, maintenance and improvement (RMI) peers has been subdued and sharp foreign exchange movements have been creating headwinds on gross margins. Berenberg said these issues are raising general anxiety about Howden.

Shares have fallen 22% in the year to date in reaction to the headwinds. Berenberg said the third quarter update due at the start of November will be key.

“Our view is that Howden is a well run, high return on capital employed company with a very solid balance sheet and a strong competitive position,” Berenberg said.

“However, acknowledging the near-term pressure on like-for-like growth and FX headwinds, we cut our numbers 3-11% over the 2016-18 period and downgrade our rating to ‘hold’.”

Berenberg believes the RMI market may remain subdued given ongoing Brexit uncertainty and rising inflation putting pressure on real disposable incomes.

While the broker expects Howden to continue to take market share, it has reduced its LFL growth forecasts to 5%/4%/3% for fiscal years 2016/17/18 respectively.

Continued sterling weakness is affecting the company as one third of its cost of goods sold are traded in euros and dollars. At the first half results on 21 July, the group reported a £20m increase in COGS but said it managed to offset some of the impact through price rises.

“Clearly, FX rates have worsened since then, leading us to cut our 2017E gross margin estimate to 62%,” Berenberg said.

“Furthermore, each 0.5% gross margin hit (all else being equal) has a c3% effect on PBT, resulting in our earnings forecasts falling considerably.”

Berenberg concluded that it thinks there will be a time to revisit Howden but it needs to see more visibility on the UK consumer outlook before regaining confidence.

Shares fell 2.91% to 386.90p at 0946 BST.