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A disposal, a return to full operation at all branches, stores and plants as lockdowns ease, and an upbeat trading statement last week all suggest that Grafton, the builders’ merchant and DIY retailer, continues to go from strength to strength.
A buoyant outlook for the construction and housebuilding industries can only help and, as long as the pandemic is kept at bay, the Dublin-headquartered company’s shares look able to add to the 50pc capital gain already accrued since our first look in 2019.
Grafton is to sell its British merchanting business to an entity controlled by private equity for £520m, including liabilities such as leases and borrowings (although the seller will retain responsibility for the defined benefit pension scheme).
The deal, announced at the very start of the month, is expected to close in the first quarter of next year and will bolster an already healthy balance sheet. At the end of 2020 Grafton had net cash, excluding £479m in lease obligations and a small pension deficit. The firm is also therefore in a position to further raise dividends and boost total returns from its shares.
The sale also gives Grafton scope to invest more in its core business and supplement its organic growth prospects with select bolt-on acquisitions, an area where management is building a good record. The latest purchase is IKH, a Finnish distributor of workwear, protective equipment and tools, for €199m (£170m).
And underlying trade does seem to be strong. It may not be a massive surprise to see sales in the first six months of 2021 come in 47pc higher than a year ago, given the impact of last year’s lockdown.
But revenues were also 18pc higher than in the first half of 2019, helped not only by strong volumes but also by price increases, which are largely matching input cost inflation and thus protecting margins. As a result, Gavin Slark, the chief executive, raised management’s earnings forecasts for the year.
Grafton continues to build strong momentum.
Questor says: hold
Ticker: GFTU
Share price at close: £12.30
Update: Restore
A planned return to the dividend list for Restore, the data and document management systems specialist, bodes well and supports our view that the company is well placed to benefit from a further easing of lockdown and a rise in economic activity.
Equally, the risks are clear should the Government’s plans go awry for any reason. But the robust balance sheet, even allowing for more than £120m of leases, should provide some protection. Restore could yet deliver some pleasant surprises. Keep buying.
Questor says: buy
Ticker: RST
Share price at close: 430p
Update: Franchise Brands
While this column continues to kick itself for 2020’s decision to give up on Morrisons, at least for growth investors, in light of the three-way bid battle for the grocer, it can at least say it has avoided the cardinal sin of impatience in the case of Franchise Brands.
The reward is a share price gain of some 80pc over the past two years and there could be more to come, given the record of founders and major shareholders Stephen Hemsley and Nigel Wray when it comes to developing businesses that are run on a franchised basis.
Last year’s lockdowns and recession hit the firm’s operations hard but by the same token it has begun to thrive as economic activity has resumed, at least if a trading statement last week is any guide. The biggest business is drain unblocker MetroRod, while plumbing services specialist MetroPlumb, car‑body repair company ChipsAway and dog sitter Barking Mad are also part of the core portfolio.
Smaller companies are not suitable for all investors. But Franchise Brands looks primed to show strong growth as it books both start-up charges and monthly income, via licence fees and product sales, from its network of 425 franchisees, which should also continue to expand. Shareholders will find out more when the company publishes its interim results next week.
There is still plenty of scope for Franchise Brands to make a name for itself.
Questor says: hold
Ticker: FRAN
Share price at close: 150.5p
Russ Mould is investment director at AJ Bell, the stockbroker.
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