Builders in this country are, in the main, a bunch of corner-cutting scallywags. But builders’ merchants are a good group of geezers: knowledgeable, happy to help and well organised. What’s more, given their increasing economies of scale they are enjoying nice margins, with much less business risk than their professional clients.
In the current UK building boom, I’m backing the canker-handed builders’ merchants, who supply the bricks and mortar, plasterboards, joists, slates and bathroom fittings and much more used in the construction of our houses.
Forget the spotty faced children staring into computer screens at Silicon Roundabout and come with me to a world of real men selling real products. Let’s get our hands dirty with the gritty aggregates of the British housebuilding upturn.
After a protracted period of stasis in house building in the UK the last two years has seen something of a boom. I’ve been looking at the Department for Communities and Local Government’s most recent Statistical Release for the first quarter of this year.
House building starts in England were 40,300 in Q1 2015, a 31% increase compared to the previous quarter and 11% up on Q1 2014. Completions were 10% higher than the previous quarter and 21% up on the same quarter last year.
Seasonally adjusted starts are now 136% above the trough in Q1 2009 but still 18% below the March quarter 2007 peak. Completions are still 30% below their Q1 2007 peak.
Annual housing starts totalled 140,500 in the 12 months to March 2015, up by 5% compared with the year before. Mind you, this is still well short of the 200,000 houses that the National House Builders Federation tells us we should be building each year to satisfy demand.
And house prices are still rising, though it seems that the London market is cooling. According to the up-market estate agents, Foxtons, prices in SW8 (Battersea) have fallen 16% in the last year. Yet, on 10 September the Royal Institute of Chartered Surveyors (RICS) predicted that UK house prices will end this year 6% higher than at the start.
What’s behind the upsurge? First, of course, a strong economy with a robust jobs market. Economic growth plus low interest rates offer ideal conditions for house building. Second the artificial stimulus of the Government’s controversial Help to Buy deposit scheme. Launched in April 2013, on 09 September we learnt that it had helped a record number of first-time buyers in June. A total of 112,803 mortgages have been arranged under Help to Buy[i]. Thirdly, since around Q3 2013 the banks have been advancing mortgages more freely.
All the politicians agree that we need to build more homes. The question has been how best to stimulate the housing sector without making houses unaffordable for first-time buyers? This has involved both supply side reforms (the snail-like pace of planning approvals, for example) and demand side stimuli.
Now a healthy property market needs two parts of the housing stock to tango. The existing residential housing stock needs to turn over, and additionally, a good supply of new homes needs to trickle onto the market, especially “starter homes” (normally flats) at the bottom end.
The main beneficiaries of a buoyant housing market are of course, estate agents, house builders, and the people who supply house builders: builders’ merchants. (Not to forget the carpet, furniture makers and retailers and their ilk whose products fill our homes).
House builders’ shares have been faring well of late. Just look at the Crest Nicholson (LON:CRST) chart over the last year. (Though has it been and gone, perchance?). But I prefer to head one stop down the value chain and to pursue the profits that can be had from those unglamorous heavies – the builders’ merchants.
There are not many listed players in this space. Jewson Limited, a British company, is private. Wolseley PLC (LON:WOS) the market leader, which is ultimately Swiss owned and a truly international player, is more focussed on plumbing and heating equipment. But the player which strikes me is not only the market leader in the sale of building materials in the UK (wholesale and retail) but is also as a branded retailer in the booming residential DIY market.
Travis Perkins PLC (LON:TPK), headquartered in Northampton, is a British company which traces its long pedigree (on the Perkins side) back to a firm of City of London carpenters and joiners founded in 1797. The current name dates from 1988 with the merger of Travis and Arnold PLC (big in the Midlands and the North) and Sandell Perkins PLC (a power in the South). Since then the company has grown steadily both organically and through acquisition.
Travis Perkins likes to describe itself as the largest supplier of building materials in the UK – but that is a modest self-appraisal. It has developed a range of mutually complementary niche brands, some of which you may have heard of, even if you are not familiar with the mother company.
The group operates through four separate but complementary business divisions – General Merchanting, Consumer, Specialist Merchanting and Plumbing and Heating.
The General Merchanting division trades across the UK through around 650 outlets under the Travis Perkins flag. Its customers are primarily professional tradesmen, ranging from skilled sole traders (carpenters, plumbers, electricians) to the leading national house builders. Travis Perkins identifies the key four needs of this sector as product range, product availability, competitive pricing and customer service.
The Consumer Division owns and operates three major high-street and out-of-town specialist retailers, namely Wickes, Tile Giant and Toolstation. Wickes is a retail phenomenon, competing with the big DIY chains in home improvement products like timber, building materials, tools and paint. It also offers small electrical appliances.
Wickes has also cleverly pitched itself against the pound shops selling micro-ticket items (refuse bags, stationary, you name it) in large volumes, and, like the pound shops, it has prospered in a dying high street. Founded in Manchester in 1972, Wickes was acquired by Travis Perkins in 2005 and now operates around 225 stores nationwide.
Tile Giant, acquired in 2007, operates from 106 big surface outlets. Uniquely, the chain sells just tiles, which come in a profusion of sizes, materials, patterns and colours. The Group foresees rapid future expansion for Tile Giant as British tastes move away from traditional carpet towards tastefully tiled floors and walls (not just in kitchens and bathrooms, either). In this respect, perhaps, we are moving back to the preferences of our Victorian forebears – the Pre-Raphaelites would have approved.
Toolstation, acquired progressively between 2008 and 2012, operates 123 trade counters across the UK offering tools and hardware to the building trade. Toolstation stocks more than 10,000 products and remains open seven days a week.
Specialist Merchanting Division embraces three separate businesses trading from 203 branches under the Keyline, CCF and Benchmarx brands. It also has a 25% interest in Rinus Roofing Supplies. Keyline offers heavy building materials, piping and drainage solutions to the construction industry. CCF is a leading supplier of interior building materials while Benchmarx supplies kitchen and joinery products and materials.
Plumbing and Heating Division comprises City Plumbing Supplies (nearly 200 outlets), BSS, PTS (Plumbing Trade Supplies) and Direct Heating Spares (DHS), the spare parts arm of City Plumbing. BSS specialises in the distribution and sale of heating, ventilation and plumbing products, tools and industrial supplies to industrial contractors, domestic plumbers, independent merchants and industrial end users through a network of nearly 400 branches.
The outlook for these businesses collectively is excellent with significant potential for growth. Travis Perkins now possesses formidable economies of scale. It claims to offer, with good justification, a sharp customer service proposition with good brand recognition and customer retention. Management has secured rigorous operational efficiency through in-house development of supply chain management systems and attracts quality personnel.
Ultimately, Travis Perkins is a retailer. It sources a huge product range from over 10,500 suppliers and sells through 1,890 outlets. It operates 24 warehouses using a fleet of over 2,300 vehicles. It has over 190,000 account holding customers and countless occasional customers. This is specialist retailer with a proven track record.
In January 2013 the Group completed the strategically important acquisition of Solfex, a group which provides integrated renewable energy systems (solar and wind) for specialist installers. Sustainability is a corporate mantra at Travis Perkins and it will be interesting to see how this business line contributes to the overall bottom line going forward.
Travis Perkins is what the equity analysts normally call a “cyclically exposed” stock which bounces in construction booms; and yet its strong performance pre-dates the current building boom. Recent numbers are encouraging as a medium term growth trend is sustained. Looking at the five-year summary, revenue growth has been compounding at over 12% per year while net profit has been compounding at nearly 13%. Last year EPS was 119 pence and the dividend paid was 38 pence per share.
On 25 August, Liberum Capital put a 2,500 pence price target on Travis Perkins’ shares. Given that they are trading at time of writing at just above 2,000 pence that implies a potential upside of 25%.
Take an 18-month forward view on this stock. These are good, business-savvy geezers – and the best is yet to come.