Lords Group Trading – another ‘buy and build’ group to follow closely as it expands

It is reckoned that only 36% of buildings are maintained to a satisfactory level.

There are some 27.8m homes in the UK, so the repairs, maintenance and improvement (RMI) market is absolutely massive.

And that is just where this company is principally focused.

The Business

Established over 35 years ago as a family business operating from its first retail unit in Gerrards Cross, Lords Group Trading (LON:LORD) is today a fast-growing specialist distributor of building, plumbing, heating and DIY goods.

Over the last decade the group has acquired over 14 family run or independent businesses.

It has built up quite steadily over the years, and impressively so, such that by July last year, when it floated on AIM, it was valued at £150m, with its shares at 95p.

At that time vending shareholders raised £22m, while the group raised £27.7m for its further development.

Its Market

The group principally sells to local tradesmen, small to medium sized plumbing and heating merchants, construction companies and retails directly to the general public.

It operates through the two main divisions: Merchanting, and Heating and Plumbing.

Merchanting: supplies building materials and DIY goods through its network of merchant businesses and online platform capabilities. It operates both in the ‘light side’ (building materials and timber) and ‘heavy side’ (civils and landscaping), through its 27 locations in the UK.

It is a consolidator of specialist merchants across the South-East and Midlands, adding value to the supply of building materials through product expertise and next day delivery across 15,000 products. Estimated sales in 2021 of £132m (£84m).

Heating and Plumbing: it is a specialist distributor in the UK of heating and plumbing products to a network of independent merchants, installers and the general public. The division offers its customers an attractive proposition through a multi-channel offering and operates through nine locations, enabling nationwide next day delivery service. Estimated sales in 2021 of £233m (£204m).

With some 80% of its focus upon the RMI market, Lords has assessed that its addressable markets are worth some £55bn in sales – that is made up through the business of general merchants, specialist merchants, sales made direct to site via merchants and finally the pure play online business.

In 2020 the group’s sales were made up as follows: new house build 5%, commercial 8%, infrastructure 7%, and repairs, maintenance and improvement 80%.

Growth Strategy

The group has a declared aim of hitting a £500m revenue milestone by 2024.

It should do that through both organic and acquired growth.

The builders merchant market is highly fragmented – with some 2,300 merchants with Nationals (like Travis Perkins, Jewson, Wolseley and Grafton) making up 51% of revenues.

Of the total market around 40% is built up by Independents – while Lords has over 1% of the industry turnover – this makes an area prime for consolidation.

And with Lords’ strategy of ‘buying and building’ it will inevitably score its aim easily within the next two years.

Latest Acquisition

At the beginning of this month the group agreed to acquire, for £23.1m cash, the AW Lumb builders merchant business.

The earnings enhancing deal helps to expand the group’s product offering and geographical reach into the North of England.

It takes in £10m net assets, £1.9m of net cash, £4.6m of freehold property, revenues (to end June 2021) of £43.3m and a pre-tax profit of £3.8m.

At the same time the group announced that it had increased its group debt facilities with HSBC to £50m, plus £20m invoice discounting.

That will spur it on to making yet another sensible purchase or two.

Its Equity

There are some 158.5m shares in issue.

The larger professional holders include Premier Miton Group (7.16%), Charles Stanley (6.62%), Schroder Investment Management (5.33%), Slater Investments (4.45%), Canaccord Genuity Wealth (2.52%) and RC Brown Investment Management (0.23%).

The board and family interests have significant holdings. Shanker Patel, CEO, holds 29.01%, while other management holdings total around 42.5% of the group’s equity.

Broker’s View

Analyst Kevin Cammack, at the group’s brokers Cenkos Securities, rates the shares as a ‘buy’.

His estimates for the end December 2021 revenues are £365.0m (£288.0m), with adjusted pre-tax profits of £11.2m (£8.4m). On estimated earnings of 5.4p per share for last year, he sees a 1.6p per share dividend as possible.

For the current year he goes for £420.5m sales, £14.8m profits, generating 7.2p in earnings and a 1.9p per share dividend.

My View

We will have to wait until May, when the results are published, to see just how well this recent AIM newcomer is progressing in the current year.

However, I feel that it now has a certain momentum that will help to drive its shares back above its peak prices achieved in September last year.

The group’s shares, which went up to 148p at their best, are currently 90p, trading below that Placing price of 95p.

It operates in a market space which I consider has tremendous potential for a ‘buy and build’ group.

I now set an early and achievable Target Price of 115p.