Shares of flooring firm James Halstead (LSE: JHD) are little changed after this morning’s release of annual results for its financial year ended 30 June.
Although listed on London’s junior AIM exchange, Halstead is one of the heavyweights of the index, its market value being £932m at its current share price of 449p. Furthermore, as today’s results once again show, this is a high-quality business. In my view, stronger than many a FTSE 100 blue chip.
Results and outlook
Halstead posted revenue of £226m, 0.5% lower than the previous year but 2% higher at constant currency. Earnings per share (EPS) increased 3.7% to 17p.
The top line was hit by weakness in the UK (33% of group revenue). Management pointed to a £1.1bn cut in the NHS’s repairs budget and reticence to refurbish in the education sector, but added that “the doubts over the economy in the weeks after the ‘Brexit’ referendum seem to be lessening”.
More importantly, the company’s international business is set to benefit from post-referendum weakened sterling. Management’s looking forward to a positive effect “on both the competitiveness of our offering around the globe and on margins”.
True measure of a business
Halstead’s balance sheet remains as bombproof as ever. Year-end current assets of £141m (including £44m cash) comfortably covered not only current liabilities of £60m, but also non-current liabilities of £27m. I can’t think of a FTSE 100 company with a balance sheet as strong.
Management believes “the true measure of a business is return as measured by dividends paid to shareholders”, and this year’s 9.1% rise in the payout, up to a record 12p, is the 40th consecutive year of annual increases. Shareholders have also enjoyed frequent special dividends (paid in four out of the last ten years).
Halstead is a fourth-generation family-controlled business, managed with a long-term view, and enriched with valuable knowledge, skills and commercial relationships built up over 101 years. Are the shares good value at a P/E of 26.4 and a dividend yield of 2.7%? I’ll come back to that question shortly.
Recovery potential
At the start of this year shares of Rolls-Royce (LSE: RR) had declined 55%, having fallen to 575p from an all-time high of 1,289p, achieved early in 2014. The decline coincided with a string of profit warnings, resulting from both external and internal factors.
The company had a pretty strong balance sheet ahead of its troubles — although not as strong as Halstead’s — and had to cut its dividend for the first time in almost a quarter of a century. The shares have now recovered to 730p, with signs that new management has stabilised the business.
The consensus analyst forecast is for EPS to bottom out this year at around 40p lower than their 2013 peak of 65.6p, giving a P/E of 28.5. That’s a little richer than Halstead’s, while the prospective dividend yield is an inferior 1.7%.
I rate Halstead a buy on the basis of the quality of its business, the strength of its balance sheet and its superb dividend record. Rolls-Royce has considerable recovery potential, but the market appears to be taking a good bit of it for granted, which may be a little premature at this stage. As such, I rate the FTSE 100 firm’s shares a hold.
