Shares in Irish-based building materials company Kingspan (KGP) rallied 7% to €62 following the release of encouraging first half results.
First half revenues of €4.15bn were modestly ahead of consensus driven by price increases to recover raw material inflation, particularly in the insulated panels segment which accounts for 64% of group sales.
Trading profit came in at €434m, 5% higher than guided by management on 20 June.
MANAGING EXPEXCTATIONS
At the end of May, Kingspan made an unscheduled update which spooked the market and sent its shares sharply lower.
Management warned that the mood in most of its end markets had deteriorated, with order intake volumes down 12% in May and June compared with the previous year.
This slowdown was compounded by difficult second quarter comparisons as customers ordered earlier in 2021 to de-risk supply chains.
However, management maintained profit guidance for 2022 and today's interim results have backed up that view.
ENVIABLE ORGANIC GROWTH
Kingspan offers one of the best organic growth profiles in the sector, while its has a good track record of adding value via acquisitions.
The group’s continued investment in new products means it has a differentiated and relatively defensive product portfolio.
Structural growth in demand for low-energy building solutions, particularly driven by tighter energy-efficiency regulations, means the group's strategy of focusing on high-performance insulation allows it to increase the penetration of its products.
FLY IN THE OINTMENT
While today’s numbers have clearly given the market confidence that the group will hit its full year guidance, there are a couple of areas of concern.
First, management has again highlighted softer trading conditions in the second quarter.
Second, the first half trading profit margin fell to 10.5% compared with 11.3% last year, and was below consensus.
The negative surprise came in the insulation segment where the trading margin fell to 10.5% from 14.0% in the prior year, while the market is expecting a full year margin of 12%.
EXPERT VIEW
Commenting on today’s results, Shore Capital analyst Graeme Kyle said: ‘We upgraded our recommendation on Kingspan from Hold to Buy on 25 January 2022, following a bout of share price weakness.’
‘The stock trades on an full year 2022 price earnings relative (PER) of 18x which compares to a 5-year average forward PER of 26x and a 2-year average of 30x’
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