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DIY Boom: Why there’s more to come and the stocks to buy now
One of the very few positive effects of last year’s pandemic was an increase in consumers spending on the repair, maintenance and improvement of their flats and houses.
Having been confined indoors for months at a time, it didn’t take long for people to set about redecorating and adding more indoor or outdoor space so they could live and work remotely more comfortably.
That led to an explosion in projects and building work up and down the country, boosting the fortunes of builders and building materials firms.
On balance we think this trend has further to run. It seems likely that the limits on availability and the rising cost of materials and labour will have delayed renovation projects for many households. And this pent up demand could easily continue to come through for the next 12 months at least. We highlight two exciting ways to play this theme.
A HUGE ‘HIDDEN’ MARKET
According to Travis Perkins (TPK), the UK’s biggest distributor of building materials, the domestic repair, maintenance and improvement or RMI market was worth £26.6 billion in revenue last year.
In the firm’s most recent survey of tradespeople across the UK, it found that alongside seasonal projects such as fitting new plumbing and heating, homeowners had responded to the ‘new normal’ with a major upturn in demand for offices, garden rooms, garage conversions and extensions.
This surge in demand was sustained throughout 2020 and has continued well into this year, even while the level of new work overall has slowed.
According to the latest construction output figures from the Office for National Statistics, there was a slight fall in total building work in May compared with April due to poor weather, although output remained above its pre-pandemic February 2020 level.
Total construction output was down 0.8% to £13.96 billion, with new work 3.5% or £320 million below the February 2020 (pre-pandemic level).
However, repair, maintenance and improvement work was 7.5% or £363 million higher than the level of February 2020 as demand continues to grow for work on existing private houses.
In value terms, the private housing RMI market rose by 4.7% between March and May compared with the previous three-month period, and by a record 63% on the same period last year when lockdown prevented tradesmen from working indoors on peoples’ properties. The value of work in May alone was up 90% on last year.
Also, according to the ONS spending on DIY goods such as hardware, paint and glass has seen no slowdown in sales growth, even in the first two months of this year, whereas non-food sales overall have fallen sharply.
HAS THE MARKET PEAKED?
There is no question that for some people remote working has been a boon, and many of them would rather keep their current lifestyle if given the choice. That is likely to keep demand for home offices and general improvements bubbling along.
However, with the Government encouraging everyone to return to the office it’s certainly possible that some of the steam will come out of the private housing RMI market.
We won’t have a clear idea until we see the figures for the third quarter and we hear from the companies involved, both distributors of building materials and the materials companies themselves.
The other big variable is the virus itself. Although some 35 million people have had two jabs, the level of double vaccinations in England is less than 70% in the age 45 to 49 cohort, barely over 30% in the 35 to 39 cohort and just 20% in the 25 to 29 cohort, according to the latest figures from Public Health England.
With the daily infection rate well above 30,000 and a large proportion of younger workers still to receive their second dose, it doesn’t take a degree in virology to know that abandoning social distancing and mask wearing and encouraging everyone to return to the office could result in another wave of infections and the re-introduction of restrictions, exactly what the Government doesn’t want.
In that scenario, more people may want to isolate themselves and work from home so the RMI market could get a second wind some time later in the year.
WHAT LOOKS GOOD?
The market hasn’t been slow to appreciate the boom in the RMI market, with the share prices of most building materials firms and distributors of building materials up 30% or more already this year and a couple of stocks up more than 50%.
That has encouraged a few new firms to come to market recently. CMO Group (CMO:AIM) claims to be the UK’s largest online-only seller of construction materials, while Lords Group (LORD:AIM) specialises in selling plumbing and heating equipment to the building trade.
There are several stocks which, although they have gained more than the market this year, are still a long way from making new highs and are actually trading on reasonable prospective earnings multiples.
Kingfisher (KGF) is the UK and Ireland’s largest DIY retailer for non-tradespeople, turning over £5.7 billion in the year to March across its B&Q and Screwfix formats. While sales last year were up around 12%, gross margins increased by 36% thanks to a higher proportion of full-price sales as consumers piled into its stores and cleared the shelves.
Just under a fifth of B&Q sales, or around £730 million, comes from its trade-focused TradePoint business, with like-for-like sales last year up an encouraging 20%, but the firm admits it has work to do to increase market share by addressing gaps in its ranges, improving its digital offering and generally raising service levels.
The French business, for a long time the weak link in the group, increased sales by 5% on a like-for-like basis to £4.3 billion last year, not that far behind the UK and Ireland, helped by Sunday opening to help meet customer demand. Castorama actually gained market share in the DIY channel for the first time in years.
However, with all these improvements Kingfisher shares haven’t just bounced back from their pandemic lows, they have more than trebled to over 350p taking them back to their highs of five years ago. They may look cheap on around 12 times current-year earnings, but we feel the easy gains have probably already been made by now.
Wickes (WIX) has a similar gross margin to Kingfisher, it looks cheap on 11 times this year’s earnings, it is a firm favourite with small builders in the RMI market – especially with the introduction of its Trade Pro mobile app – and its shares have gone nowhere since it was spun off from Travis Perkins (TPK) at the end of April.
It has also developed a new niche in the DIY market with ‘Do It For Me’ projects. Its in-store consultants design new kitchen and bathroom installations, customers can get finance from a third-party provider and Wickes has a network of external fitters who actually do the work. Last year it completed more than 14,000 DIFM projects and the firm believes there is large untapped demand going forward.
Specialist retailer Topps Tiles (TPT) has an even more impressive gross margin, trades on just 12.9 times current year earnings and has seen ‘robust’ growth in sales since its stores reopened in April.
The firm is targeting a 20% market share or £1 in every £5 spent on tiles and associated products in the UK by 2025, and has successfully extended its range into outdoor products with decorative wall and floor tiles, playing to homeowners’ desire for more attractive outside space.
While it mostly targets the domestic refurbishment market it has a dedicated trade site and is expecting sales in its commercial business to improve as key market sectors begin to recover.
New kids on the block what makes recent stock market joiners CMO and Lords different?
CMO (CMO:AIM), which listed just over a month ago, claims to be the UK’s biggest online-only seller of building materials. Founded in 2008, the £145 million market cap firm is leaner than other players as it sells solely through a series of websites targeting specific products such as doors, drainage, energy efficiency and insulation.
By not having its own stores or warehouses, CMO claims it can price products more cheaply than traditional builders merchants and get them distributed directly by the manufacturer. Its recent acquisition of fast-growing Total Tiles means it will soon be competing directly against Topps in the online space.
Lords Group (LORD:AIM), which has a £165 million market cap, also floated last month and specializes in the distribution of building, plumbing, heating and DIY goods to both trade buyers and the public.
The firm is highly acquisitive, having amassed six deals between 2016 and 2020 with an average return on investment of more than 20%, and intends to use the £52 million raised in its initial offering to continue growing organically and through further deals.
BUILDING PRODUCTS DISTRIBUTION SECTOR BECOMES MORE FOCUSED
The distribution of building products in the UK is becoming a more specialised affair with companies narrowing their focus to excel in certain product areas and markets.
Irish investment bank Davy says: ‘Specialist formats – such as Selco, Toolstation, Screwfix and Howdens – have been expanding rapidly and taking share. These specialist formats are typically characterised by features such as accessibility, convenience and service.
‘They offer a deep product range and are digitally enabled. For the owners, there is the attraction of high returns, low capital intensity and scalability.’
By Davy’s calculations these formats accounted for around 30% of revenue in 2020 which is double the level they were at 10 years ago.
After its recent decision to dispose of its traditional building merchant operations in the UK for £520 million, Davy notes Grafton (GFTU) will derive 75% of its UK distribution revenue from Selco.
TWO STOCKS TO BUY
Grafton (GFTU) £12.29
The recent sale of its lower margin builders’ merchant businesses in the UK should improve profitability at Grafton (GFTU) and, assuming it completes as planned in the first quarter of 2022, will leave the company with a strong balance sheet to pursue acquisitions.
Berenberg forecasts a resulting improvement in its EBITDA (earnings before interest, tax, depreciation and amortisation) margin from 9.1% to 12.6%.
The remaining bits of the business, which includes Selco and the Woodie’s DIY, home and garden chain in Ireland, are in excellent shape, thanks in no small part to strong demand from the RMI market, with like-for-like growth across its continuing operations of 17.8% versus 2019.
Berenberg forecasts net cash of £679 million by the end of 2022 and valued on an EV (enterprise value) to EBITDA basis for that same year, to encompass this large cash position, it looks inexpensive on a multiple of 8.9 times.
Epwin (EPWN:AIM) 104.2p
Epwin is a trade-focused manufacturer and supplier of PVC windows, doors and fascias and sells to the new build, social housing and RMI markets through a network of builders merchants and installers.
As well as strong demand from the RMI and new-build sectors, sales are being driven by increasing government regulation on environmental and safety concerns, which require improvements to homes on a larger scale than just routine maintenance.
In its latest trading update the firm posted a 69% increase in sales against the same period last year and said it is managing both supply chain issues and input costs by raising prices to customers, albeit with a delay in most cases. Against this backdrop a price to earnings ratio of 17.5 times looks attractive.
Building materials - Who does what?
Marshalls (MSLH) - Paving slabs - PE: 27
The paving slab and street furniture specialist has a track record of targeting areas of growth and has strong digital capability, serving a client base which runs from from big governmental and corporate clients down to tradesmen putting in patios and driveways in people’s homes.
Norcros (NXR) - Bathroom kit - PE: 9.6
Specialises in bathroom fittings and accessories including the leading Triton shower brand. Has broadened its offering with acquisitions. Operates in UK and South Africa.
Kingspan (KGP) - Insulation - PE: 35.1
As well as insulation and building envelope solutions for large projects such as the new V&A museum in Dundee, Kingspan also sells domestic insulation products. Its ESG credentials have been hit by accusations over the part played by its K15 insulation in the Grenfell disaster.
James Halstead (JHD:AIM) - Flooring - PE: 31.8
The flooring products firm has a track record of innovation and has delivered strong total returns to shareholders over the long term including a unbroken record of dividend increases running back to the late-1970s.
Volution (FAN) - Extractor fans - PE: 23.4
Has seen a big benefit from increased awareness of the need to improve ventilation in a post-Covid world, product range includes extractor fans for residential use.
Windows and doors
Epwin PE: 17.5 | Tyman PE: 14.4
Listing on AIM in 2014, Epwin manufactures PVC windows and
doors and is a leader in several of its end markets. Tyman makes highly engineered products like hardware for windows and doors, smart entry and monitoring products, as well as seals and extrusions and access solutions for commercial buildings.