During the 20th century, Henry Boot (LSE: BOOT) was a vast enterprise with building, construction, civil engineering and other related businesses within its portfolio.
A series of disposals and a rationalisation agenda over the past few decades have transformed the company into a land management, property development and construction company today – a smaller, leaner and more focused operation with the potential to keep on growing.
Good strategic progress
One of the things I like about Henry Boot is its record of dividends. The payment has gone up a bit every year since at least 2013. Another attractive feature is the modest level of debt on the balance sheet.
I’m less keen about the inherent cyclicality in the business. Revenue, earnings and cash flow demonstrated their volatility during 2018. And the share price sank by around 32% between its peak in January 2018 and August 2019. However, since then it’s bounced back up and now trades within a whisker of its previous high. Perhaps the easing of Brexit uncertainty had a bit to do with that.
In today’s update for the full 2019 trading year, the directors revealed to us that the company made “good”strategic progress in the period “against an uncertain political and economic background.” But I’m nervous about the short-term prospects for the company, and the directors’ comments didn’t reassure me. They said in the report: “As a long-term business, Henry Boot is well-positioned.”
Meanwhile, the overall performance of the business in 2019 was “marginally lower” than the board’s original expectations. That was driven by the disposal of “the majority” of the firm’s retail investments, which reduced rental income. I reckon that’s a good thing, and I’m pleased to see the firm still nipping and tucking its operations for optimal trading.
The sales have endowed the company with higher-than-expected net cash of around £30m, which compares to a net debt position of £18m a year earlier. That dry powder means the company is well-positioned to take advantage of “several” opportunities for reinvestment that the directors have identified for 2020.
Is the construction division a weakness?
The construction arm of the business has negative potential, in my view. For perspective, during 2018 around 18% of overall operating profit came from construction activities, but the division accounted for about 25% of total revenue. We’ve seen several investing disasters over the years from listed construction companies, and the turnover in that area of operations could cause a headache if it starts generating losses.
But the directors said in the narrative that construction held up well in 2019 “especially given the much-publicised challenges facing the construction market.” There’s a strong order book in the division for 2020.
The overall outlook is positive, but I can’t help thinking that the share price could swing lower before it goes meaningfully higher, and I’d be more inclined to buy such dips than I am to pick up the shares now. With the share price at 327p, the forward-looking earnings multiple is just under 11 for 2020 and the anticipated dividend yield around 3.4%. I’d aim to buy when the valuation looks lower.
