Better than expected full year results from kitchens seller Howden Joinery (HWDN) help to drive a 9.2% rally in it share price to 485p. That's the highest level since the day before the EU referendum vote result in June 2016.
You may wonder why the shares are rising given that it has reported a fall in earnings and there is negative data out on the state of the housing market (which is important to demand for its kitchens).
It’s all down to what the market was expecting versus what the company delivered.
WHAT DID IT ACHIEVE?
In Howden’s case, full year operating profit of £234.4m was better than the market consensus forecast of £224m.
The company’s operating margin fell from 18.1% to 16.7% - however, that again was better than the market expectation of 16.2%.
Pre-tax profit fell by 2% to £232.2m while revenue grew by 7.4% to £1.4bn. It has faced currency headwinds and additional operating costs.
HOW HAS THE NEW YEAR STARTED?
Howden says it has enjoyed a good sales performance so far in 2018. Excluding the first two weeks of trading, UK depot sales growth is 12.5% year-on-year. The annual average revenue growth for the same period of trading from 2016 to 2018 was 7.9%.
The year-to-date growth is attributable to higher volumes and aided by a weaker prior year comparative.
‘The advance compares to our full year assumption of 2.5% same depot revenue growth, which will clearly be supplemented by new openings,’ says stockbroker Davy.
‘In this regard, there were 19 new stores opened last year - taking the total to 661 - and a further 30 are planned for this year. This will have some cost implications, while Howden is also suggesting extra operating costs of around £20m related to investing across the business, including digital upgrades.’
NEGATIVE ISSUES TO CONSIDER
We’re surprised that shares in Howden have risen so much given negative figures from Nationwide today on the health of the property market. It shows a slowdown in annual UK house price growth and a fall in prices over the past month.
Nationwide says the slowdown is consistent with signs of softening in the household sector in recent months.
'Howden arguably needs a robust housing market as moving home is a key catalyst for ordering a new kitchen,’ says Russ Mould, investment director at AJ Bell.
‘It believes current market conditions are stable, although it remains watchful given “continuing economic uncertainties”.
‘While the company has a good track record of managing costs in more difficult times, the direction of its share price will be heavily influenced by investors' view of the UK property market and UK economic strength.
‘Just look at the fact that builders' merchant Travis Perkins, estate agent Foxtons and housebuilder Taylor Wimpey all saw their share prices weak on Wednesday as the market reacted negatively to all things related to the property sector.’
So while Howden’s shares are up today, further weakness in the property market is a factor to watch and that could weigh on investor sentiment.
