There is positive read-across from a sector rival and from activity in the property market
Thursday 16 Jan 2020 Author: Ian Conway

Shares in builders’ merchant and tool-hire firm Travis Perkins (TPK) had a bumpy ride last quarter thanks to negative sentiment in its sector caused by profit warnings from building supplies firm SIG (SHI) and a drop in UK housebuilding activity amid uncertainty over Brexit and the general election.

With the election out of the way and Brexit due to be formalised later this month, the housing market already seems to have recovered some of its poise.

Large sales that had been on hold have gone through and estate agent Savills (SVS) reported that improved buyer sentiment had led to a ‘strong’ finish to the year, which should lead to improved sentiment across the sector.

Rival builders’ merchant Grafton (GFTU) also said trading at the end of 2019 was better than expected. All this activity suggests that Travis Perkins is well worth a look at the current price.

In the three months to the end of September, Travis reported like-for-like sales up 3.4% with notable contributions from the Toolstation equipment hire business and the Wickes retail business.

However the core direct-to-trade merchanting business reported flat like-for-like sales after accounting for a difference in trading days due to the tough market backdrop.

What growth there was, mainly in ‘heavyside’ categories, was down to price increases rather than higher volumes.

In December 2018, management announced a plan to cut costs, simplify the group and focus on its strengths in the direct-to-trade business by selling both the Wickes consumer-facing division and the wholesale plumbing and heating division. A buyer has now been found for the latter with Travis getting £46m in cash before working capital movements.

The cost-cutting programme is already bearing fruit and is expected to save between £20m and £30m of operating expenses by mid-2020.

Last month, new chief executive Nick Roberts confirmed that the Wickes demerger was on track for the second quarter of this year.

To say that the investment community is undecided on Travis is an understatement. Of the 20 analysts who cover the stock, 15 are firmly on the fence with a ‘hold’ recommendation according to Reuters. At the same time the consensus price target is £14.60 or more than 8% below the current share price.

With the fourth quarter trading update still to come there may be another wobble in the share price, but our feeling is that the firm is through the worst of the slowdown and is right-sizing itself to improve returns once construction spending and the housing market pick up.

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