Grafton Group Executive Chairman Michael Chadwick

Grafton Group which operates in DIY and building materials supply businesses in the UK and Ireland, today reported that revenue fell 26% to €1.98bn from €2.67bn in 2009 and pre-tax profits dipped 79% from €64.1m to €13.6m. Grafton said its cost base was reduced by an annualised €85m; net debt was cut by €227.9m to €322m and freely available cash deposits amounted to €302m at year end.

Commenting on the outlook, Michael Chadwick, Executive Chairman said: “Group sales in the second half of 2009 were similar to the first half. This stabilisation of sales, combined with the action taken to substantially reduce the cost base and integration benefits in our merchanting business, resulted in improved profitability during the second half of last year. Sales in the first two weeks of January 2010 were affected by snow. Since then sales have been close to expectations and last year with good increases in sales into the UK new housing sector."

Turnover in the merchanting business was €1.69bn, down 26 per cent from €2.28bn.  Segment operating profit before rationalisation costs was €39.3m compared to €121.9m in the prior year. Merchanting branches located in the UK recorded a turnover decline of 20 per cent to €1.32bn from €1.64 bn. The decline in sterling turnover was 10 per cent and average daily like for like sales were down by 11.9 per cent.  Operating profit before rationalisation costs declined to €43.5m from €73.6m. The operating profit margin was 3.3 per cent (2008: 4.5 per cent). In the UK, 2008 average daily like for like sales were down by 6.5 per cent for the year. In quarter 1 of 2009, average daily sales contracted by 18 per cent after which the rate of decline moderated to 16 per cent in the second quarter and returned to modest growth by the year end.

Merchanting branches located in Ireland recorded a turnover decline of 42 per cent to €370m from €642m. The Irish merchanting branches combined reported an operating loss of €10.3m before a property profit of €6.1m and rationalisation costs.  This compares to a profit of €48.3m in 2008.

Grafton said the businesses located in Ireland traded during 2009 against the background of an economy going through a severe recession and a housing market that continued to experience a very sharp decline in output following a prolonged period of growth. The Irish economy is estimated to have contracted by 7 per cent last year, as measured by GDP, following a decline of 3 per cent in 2008. The recession was accompanied by increased unemployment, tight credit conditions and an increase in precautionary saving.

The number of house completions in Ireland during 2009 is estimated at 17,000 units adjusting for unsold units in stock and at various stages of construction. This is less than a fifth of output at the peak of the market in 2006. Housing starts are estimated at less than 10,000 units comprising mainly one-off houses.  Scheme house and apartment construction declined to negligible levels. Non-residential construction was also down due to weak demand for retail and commercial property.

Results detail 

Goodbody analyst, Robert Eason, commented: Grafton; A remarkable H2, moving from “Add” to “Buy” - - "Grafton Group has reported results for the 12 months to the end of Dec-09 and as expected sales are in line with both our forecasts and the detailed guidance given in the January trading update (-26%). However, the return to profitability in the second half has been a lot more marked than our expectations, resulting in an adjusted EBITA of €20m (versus forecast of €11m). At the earnings level, the positive variance widens further, reflecting lower than expected interest and tax charges. As a result, we estimate adjusted earnings to be circa 4c, well ahead of our forecast of a loss per share of 3c. The other key takeaways are increased annualised cost savings (€85m versus €74m previously) and better cashflow generation (net debt of €322m versus forecast of €357m). We would also interpret the outlook as being reasonably positive with signs of stability continuing in terms of group sales.

In the results preview note, we highlighted that there was long-term value in investing in Grafton, based on: (i) the share price is below our stressed NAV of 288c, which itself is below the reported NAV of 395c. The latter is after only a €5.5m goodwill write down in FY09 (related to manufacturing activities), while the goodwill associated with the retail and merchanting activities has been deemed to be not impaired; and, (ii) Assuming through the cycle margins of circa 6.5% on a modest recover in sales by 2015, yields a current price of circa 300c.

However, we argued that there was a lack of catalysts, but this has changed with this set of results, given additional restructuring which is likely to bring forward the breakeven point for Ireland and enhance short-term profitability in the UK, a more up beat outlook (particularly with regard to its prospects in Ireland) and a further successful heath-check on reported NAV. As a result we are moving from “Add” to “Buy”."