Travis Perkins: drilling down

The really determined can make a bull case for Travis Perkins, builders’ merchant and favourite hang-out for DIY-aficionados. Determination is needed, as both share price and fundamentals are bleak.

Since June, the shares are down a quarter, falling 5 per cent on Wednesday’s trading update. Travis, unlike rival Wolseley, is 99 per cent exposed to barely-growing UK construction. And awesome kit like the DeWalt Cross Line Laser and Hammer Drill, yours for £200, is made overseas.

The pound’s collapse means either the price must rise, hurting customers’ wallets, or Travis’s margins will suffer.

This leaves nothing but unpleasant choices. Travis announced some branch closures and job losses in its latest quarterly results, which despite market disappointment could have been worse.

There was like-for-like sales growth in most segments, particularly the consumer side (6 per cent, year-on-year). The exception was plumbing and heating, hit by the gradual end of government-funded efficiency schemes; a blow, but by its nature not one that will repeat.

The bull case has various other parts. There is a government vow to build more houses; yes, a promise often broken, but this government will be all the more keen to keep it, given what a “hard Brexit” does to other drivers of growth.

Also, builders and households are less indebted than during the last recession, which saw Travis shares fall 85 per cent. Its own balance sheet is in better shape, too, with net debt below one times earnings before interest, tax, depreciation and amortisation. A price of 11 times 2016 earnings, according to UBS, is not expensive.

Add to this a record of cost discipline (Travis made profits through the financial crisis) and you have your bull case.

Against this, no one, including Travis, has any idea of how the inflation about to hit the high street will affect sentiment. Hence Travis’s belt-tightening which, if echoed by their customers, will lead to a DIY recession with no instruction manual.

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BDC 305 Jun 2023