Grafton H1 profit up but warns of challenging UK merchanting backdrop

FTSE 250 builders merchant Grafton Group posted a rise in first-half pre-tax profit as revenue grew thanks in part to strong growth in the Netherlands and Ireland, but the company warned of a challenging backdrop in UK merchanting.

In the six months to the end of June, pre-tax profit was up 8% to £62.8m on revenue of £1.2bn, up 13% from the first half of last year.

Grafton said revenue growth was broadly split between existing business and acquisitions.

Adjusted group operating profit before property profit growth came in at £64.8m from £55.1m in 2015, reflecting strong contributions from Ireland, and the recent acquisition of Isero in the Netherlands and Selco in the UK.

The company declared an interim dividend of 4.75p per share compared to 4.50p the year before.

Chief executive officer Gavin Slark said: “Despite the more uncertain and competitive market conditions in the UK, Grafton continued to make good progress in its key markets enabling the group to record revenue, profit and earnings per share growth as well as strong cash generation.

“Both Ireland and the Netherlands continue to show strong growth with ongoing development opportunities. Grafton will continue to invest in areas of its business which combine good long term growth prospects and the opportunity to improve the group's operating margin and return on capital employed."

Grafton said that in the UK, performance contrasted between the continuing growth in profitability of Selco and the more challenging markets faced by the traditional UK merchanting business, which accounts for more than 70% of group sales.

“Progressively weaker trading conditions were encountered during the period at a time of increased uncertainty in the lead up to the UK's EU referendum,” it said.

In Ireland, the merchanting business benefited from strong growth in the residential repair maintenance and improvement market and the early stages of recovery in the new housing and commercial property markets.

Meanwhile, the Netherlands merchanting business acquired in November 2015 was underpinned by the ongoing recovery in the economy and housing market.

Numis said the interims demonstrate further progress, with double-digit percentage growth in profits. However, based on continued competitive pressure in UK merchanting plus the uncertain backdrop following the Brexit referendum, the brokerage cut its 2016 pre-tax profit forecast by 10% and its 2017 forecast by 16%.

Canaccord Genuity said the focus was likely to be on the UK merchanting performance, which seems to be underperforming peers at the margin level.

“Consensus is likely to move lower on the weaker than expected UK margin performance. Valuation looks up with events after the recent bounce with the share price close to our price target. We would not chase the shares after the recent bounce and questions at the meeting are likely to be focused on understanding the UK margin performance and outlook.”

At 0948 BST, Grafton shares were down 7.6% to 562p.