Building materials and DIY group Grafton has returned to the black in H1 2010 and forecast further improvement in the second half following spending cuts.

Grafton reported an operating profit of €14.8m following an €8.3m loss a year earlier, after lower costs offset a 1% fall in revenue to €979m. Pre-tax profits were €13.4m, up from €3.7m a year earlier when the figure was boosted by property sales.

Commenting on the outlook, Michael Chadwick, Executive Chairman said: "The market challenges faced by the Group over recent years eased considerably in the first half. Losses in Irish merchanting were much reduced and operating profit in UK merchanting increased strongly. The improved trends in Group turnover were sustained in July and August. Grafton's profits are now recovering and we expect further profit improvement in the second half. A good base has been established from which renewed growth in earnings can be generated over the coming years as market conditions normalise."

Results detail

Goodbody analyst, Robert Eason, commented: "Grafton has reported adjusted earnings of 7.0c for the six months to the end of June. This is significantly ahead of our forecasts of 2-3c on the back of better underlying profits (driven by higher gross margins, +26bps) and a lower than expected interest charge. The latter was more to do with accounting for pensions / derivatives rather than the underlying financial charge. Underlying profits were significantly ahead at €18.7m versus our forecast of €12.3m. This was down to gross margins being up versus our forecast for a decline, while underlying operating costs were broadly in line.

At a divisional level, the largest outperformance came from merchanting, particularly in the UK with profits of €27.9m (versus forecast of €19m), representing a margin of 4.1% (up 200bps yoy). The outturn in Irish merchanting was also ahead with losses of €0.5m, down significantly from last year’s €6.9m and versus forecast losses of €3.2m. Net debt at the end of the period was €281m, down over €40m on the year-end and ahead of our forecasts of €297m. The key variances were higher than expected profits and a further working capital inflow of €21m (versus forecasts of €10m). Furthermore, it has refinanced its debt out to 2013 and as expected the margin is significantly higher than was previously paid.

While there are cautionary comments on the UK, given recent weaker macro data, lfl merchanting sales were up 6.3% in July (+4% in Feb-June). Furthermore, the improving trend in Irish merchanting has continued with sales down 6% in July (-16% in H1). The trend in retail / manufacturing in July was consistent with H1. 'These more positive trends continued at a similar pace during August." Both the results and the outlook demonstrate that the company has turned the corner, with the bias to FY10 forecasts on the upside. This, and the fact that the shares now trade below our stressed NAV of 280-290c, highlights value in the medium-term."