Despite rising almost 60% in value over the past year, shares of plastic doorframe and window manufacturer Eurocell (LSE: ECEL) still trade at a bargain basement 8.9 times trailing earnings while kicking off a healthy 3.74% dividend yield.
The company has done remarkably well recently as rising property values and solid economic growth have led homeowners to upgrade to double-glazed windows and doors or add a conservatory to their homes. This has driven demand for the rigid plastic frames that Eurocell makes and distributes.
By acquiring competitors and expanding its retail presence across the country, this growth has continued in the six months to June despite a flat remodelling market in the UK. Year-on-year (y/y) revenue rose 11% to £108.1m as the company opened up 15 new branches and also made inroads into the new build housing market that continues to grow steadily due to restricted supply.
It wasn’t all good news though as rising materials costs due to inflation and the weak pound did send gross margins down from 52.1% to 51.4% y/y, which led to adjusted earnings per share rising by just 8%. However, with net debt falling to just £20.8m, or less than one times EBITDA, management was still able to increase the interim dividend payout by 7% to 3p per share.
If last year’s final dividend payout of 5.7p per share rises by a similar amount, investors could be looking at around a 9.1p payout for the full year that would yield roughly 4% at today’s share price.
That said, the markets it targets are very reliant on continued economic growth and rising property values. And the fact that companies such as Safestyle UK that operate in the same sector have recently warned on profits is not a good sign. Eurocell continues to grow nicely and offers a healthy dividend yield, but the cyclical nature of the sector scares me and I reckon there are safer income stocks out there.
Too good to be true?
While Eurocell looks cheap and its dividend yield is impressive, both figures pale in comparison to those posted by NAHL Group (LSE: NAH), which offers a 14.6% dividend yield while trading at just 5.4 times forward earnings.
These figures may look incredibly appealing but when something looks too good to be true, it generally is. I believe this holds true in the case of NAHL. The group’s core business is operating the National Accident Helpline that connects those injured in accidents with a lawyer in exchange for a small fee.
This was a tidy little business for a long time but proposed regulatory changes have the potential to damage it. The main alterations would be an increase in the maximum claims ceiling that could be sought in small claims court, which would mean less need for lawyers, and changes to how personal injury cases are compensated. The market has understandably reacted negatively to these proposals and sent the share price of NAH plummeting 45% over the past year.
There’s still hope for NAH as it is diversifying its revenue streams, remains highly cash generative and has low debt. But until we see for sure what effect these proposed changes will have on NAH’s bottom line, I won’t be picking up its shares.
