Woodie’s owner Grafton sees profits grow 12% as UK sales rebound in late 2016

Woodie's DIY stores owner Grafton Group posted a better-than-expected 12 per cent profit surge last year, helped by a recovery in sales in its key UK merchanting business in the final quarter after a period of weak activity post-Brexit.

Shares in the group surged by 7.9% to £6.55 in early trading in London.

Operating profit rose to £142 million (€165 million) for the year from £127 million for 2015, comfortably beating the consensus £133 million estimate among analysts that follow the Dublin-based company.

Sales jumped 13 per cent to a record £2.5 billion and the group plans to hike its full-year dividend by 10 per cent to 13.75p.

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"2016 represented an overall strong financial performance despite challenging trading conditions in the traditional UK merchanting market," said chief executive Gavin Slark. "While uncertainties remain about the UK economy, the recovery in the Irish and Netherlands markets is forecast to continue."

While shares in Grafton Group have rallied from their lows immediately after UK voters decided last June to leave the European Union, the group’s market value, at £1.55 billion still remains 8 per cent off where it was before the referendum – amid concerns over the group’s biggest unit, UK merchanting. Grafton incurred a £19.7 million restructuring charge last year as it closed 47 branches in its UK plumbing, heating and contracts businesses.

Bright spot

Still, the company’s UK trade-only Selco Builders Warehouse business, which is geared towards small jobbing builders, stood out as a bright spot. The group opened seven Selco branches last year and plans at least a further 10 in 2017.

Revenues in the key UK merchanting business, which accounts for 70 per cent of the entire group, rose by 6.6 per cent last year, recovering in the fourth quarter, after being “relatively flat” in the third quarter in the wake of the UK referendum on EU membership. Operating profits fell by 5.9 per cent to £99.7 million.

In Ireland, the merchanting unit – comprised of Chadwicks and Heiton Buckley – delivered 27 per cent operating profit growth to £27.1 million. However, the depreciation of sterling against euro meant profits surged by almost 45 per cent when translated in the pounds. The company plans to open three new Irish stores this year, the first such expansion since the onset of the financial crisis.

"Even though we're seeing a good, strong performance in Ireland, it's coming back from very low levels," Mr Slark told The Irish Times. "We believe we are looking forward to several years of growth. We are seeing a broad based construction recovery in the market."

Woodie’s operating profit rose by 91 per cent on a constant currency basis, to £7.3 million, as sales rose 5.6 per cent to £157.1 million.

Grafton Group’s £17 million reduction in its net debt last year, to £96 million, surprised most analysts. Mr Slark said that the company, as a result, has the financial headroom for between £200 million and £300 million on acquisitions and expansion this year.

“There’s nothing that we are looking at the moment that we don’t [have the resources for],” said Mr Slark. “It’s about finding value and making sure we we buy at a fair and reasonable price.”

Rising costs

Meanwhile, the group’s average daily like-for-like sales grew 4.7 per cent in the first two months of 2017, with UK merchanting sales rising 4 per cent while Irish merchanting business jumped 13.9 per cent, revenue in Belgium slumped by 12.3 per cent. Dutch merchanting sales few by 2.9 per cent.

The group warned that while it expects business volumes to grow this year, margins may be hit by competitive markets and rising costs in the industry.

“Grafton’s 2016 results are comfortably ahead of expectations,” said Davy analyst Michael Mitchell. “They are also extremely impressive against the backdrop of a challenging UK merchanting environment.”