Grafton Group, the builders materials and DIY group returned to profit growth in 2010 and it said today it's is emerging from the downturn with strong market positions.

The UK merchanting business benefitted from an improvement in market conditions increasing turnover and profit. The rate of decline in turnover in the Irish merchanting business moderated and the business was returned to profit for the year. Turnover was lower in the Irish DIY business but the business remained profitable.

Group turnover increased 1% to €2.00bn from €1.98bn. Operating profit before amortisation, restructuring and impairment costs increased by 93% to €50.6m (2009: €26.2m). Profit before taxation increased to €25.6m from €13.6m after a restructuring and impairment charge of €15.4m.

Grafton said it continued to respond to excess capacity in the branch network and implemented measures that reduced overheads in the like for like business by €27.4m. There was a small improvement in the gross margin.

Profit after tax of €64.0m (2009: €13.4m) reflected a taxation credit of €38.4m which is principally due to a deferred tax asset in the UK business relating to future deductions that are now agreed.

A dividend of 7 cent has been declared - -  up from 5 cent per share in 2009.

Commenting on the outlook, Michael Chadwick, executive chairman said: “The Group’s strong financial position and lower cost base leave it well placed to benefit from improvements in its markets. The UK economy appears to be in a modest growth phase and activity in our sector has recovered from historically low levels. The outlook for Ireland remains unpredictable. Group turnover for the first two months of 2011 is encouraging with a continuation of like for like sales growth in the UK and signs of stabilisation in Irish turnover. We expect further improvement in profit as markets recover.”

Results detail

Goodbody's Robert Eason commented: "Grafton has reported adjusted EPS of 18.4c for 12 the months to December end, which is ahead of forecasts. The key variances were weaker than expected underlying operating profits (driven by UK merchanting, while Ireland was ahead), which was offset by a lower effective tax charge.

This is before a number of exceptionals, including €5m of restructuring costs, €10m of asset impairment in manufacturing and a €38.4m tax credit. The key features of the results from Ireland were: (i) While sales recorded another yoy decline (merchanting -11%, retail -7% and manufacturing -32%), sales were sequentially flat H1 on H2, highlighting some stability returning to markets; and, (ii) Despite a decline from peak sales of over 50%, the return to profitability is ahead of expectations, with merchanting delivering profits of €3.7m (€4.2m in H2) versus expectations of €0.5m and retail at €2.4m versus forecast of €0.7m.

This reflects a focus on cost reduction, with a further €16m (17%) taken out in merchanting in the year. As expected, UK merchanting lfl sales improved as the year progressed with 2.3% for the FY versus 4.5% in Jul-Nov. However, despite this pick-up, the drop down to profit was not as strong as expected. Indeed, divisional FY profits were up over €14m yoy, most of which came in H1.

As a result, margins were actually down in H2 (40bps yoy) versus +200bps in H1. With all the attention on drop-down, this may be regarded as a disappointment. However, it is our understanding that the H1/H2 split has been affected by a more even split of rebates through the year. The outlook is very much as expected, with management looking 'positively on the total levels of trading achievable during 2011' in the UK, while it is encouraged by the return to profitability in Irish merchanting and the resilience of the Irish retail.

Indeed, management note that “group turnover in the first two months of 2011 is encouraging with a continuation of like for like sales growth in the UK” (+8%) and 'further stabilisation in Irish turnover' (only -2%).

The confidence in the year ahead is reflected in a 40% increase in the dividend to 7c, which is ahead of our expectations. At first glance, these results do not change our view that mid-cycle earnings of up to 60c is achievable."