To Leicester’s pantheon of home-grown successes (Showaddywaddy, Next and the Foxes) should surely be added Dunelm. The home products retailer has had a tremendous sales and profits run since floating in 2006. It is, however, still a bit of a mystery to City fund managers, few of whom live in Catford, the closest it gets to a central London branch.
That is about to change as Dunelm targets the capital for three out of nine planned store openings this year. The push into London and the southeast should help to spawn a new source of well-off shoppers and a new investor fan base for a company that competes with John Lewis at the top end and pound shops at the bottom for everything from curtains to armchairs to crockery.
Dunelm published another strong set of figures yesterday, with pre-tax profits rising 6 per cent to £129 million, while it generated net cash of £148 million from operations. The chart above shows the consistent progress on those two metrics.
John Browett, chief executive, sees plenty of growth through new store openings, by sweating the existing stores harder and by pushing on with online sales, which account for 7 per cent of total revenues. He reckons that 20 per cent is attainable. A new warehouse in Stoke-on-Trent doubles capacity, reduces dependence on third-party storage firms and provides scope for supply-chain improvements.
A cautious outlook statement took the gloss off the results. The sunshine has reduced footfall in the past few weeks, but Mr Browett is confident that this is down to the weather, not the Brexit vote.
Investors that bought in the float have quintupled their money even before counting dividends. The company is throwing off cash without skimping on investment. It accompanied the ordinary dividend with a special dividend. After yesterday’s 2.5 per cent fall to 892½p, the shares trade on 17 times expected profits in the current year and yield 2.9 per cent counting only ordinary dividends. Add in the kinds of payout seen this year and the yield is more like 6 per cent.
Some investors may not like the 51 per cent controlling interest of the Adderley family, but this is more of a benefit than a problem. The company is less likely to be allowed to do anything too daft. Any weakness should be seen as a good buying opportunity.
MY ADVICE Buy
WHY There is great cash generation here, an uncomplicated strategy
and a potentially lucrative foray into the rich south
Wilmington
There’s money in compliance officers. Not for the banks, insurers and fund managers who have to hire them but for the businesses that train them. Wilmington has done well on the back of the City of London’s post-crisis compliance bonanza.
Yesterday it posted a 13 per cent increase in adjusted pre-tax profits to £20.9 million, a fourth successive year of profits growth above 10 per cent. Again it was the compliance and risk division that delivered the goods. It now accounts for 40 per cent of revenues and 50 per cent of profits. The only thing holding it back is a shortage of qualified trainers. It’s a less happy story in the legal division. Law firms are bringing training in-house and doing less face-to-face training. Revenues here dropped 5 per cent.
Brexit has to be good for Wilmington, as Britain braces for a different set of rules and regulations, and all the training that will require, yet the shares remain relatively unloved and have been drifting over the past year. After yesterday’s 1 per cent fall to 245½p, they trade on a relatively undemanding 13 times expected earnings and yield 3.3 per cent. That’s a bit ungenerous.
MY ADVICE Buy
WHY The shares look cheapish for a business growing nicely
Galliford Try
Galliford Try is a curious hybrid. Share market traders tend to focus on its housebuilding division because that is where the growth in profits is coming from, but it has a much bigger (in sales terms) construction division, as well as an interesting affordable housing division that builds flats for councils and housing associations.
That three-pronged structure means that it has lagged behind purer housebuilders in recent years. Over the past five years Galliford shares are up by 65 per cent, but those of Persimmon, Taylor Wimpey and Bellway, for example, have boomed by between 120 per cent and 150 per cent.
This diversification will remain a handicap for now, but housebuilding shows every sign of continuing to do well. The post-referendum decline in buyer interest was a fleeting wobble.
Construction remains difficult. The margins are wafer thin at 1.1 per cent and Galliford warned that they were about to get thinner still. The affordable housing division looks more promising. A 21 per cent increase to the total dividend to 82p yesterday cemented Galliford’s reputation as a generous income stock. Even after the resultant 7 per cent surge in the shares to £12.15, they yield nearly 7 per cent.
How sustainable is that dividend? One slight concern is that debt is creeping up, from an average of £168 million last time to £204 million, and dividend cover is a lowly 1.6 times. But this is where the hybrid nature of Galliford should pay off. It has other strings to its bow when the residential market next droops.
MY ADVICE Buy
WHY Hybrid business model supports the juicy dividend
And finally . . .
Secure Trust Bank confirmed plans to leave the junior AIM market and seek a full listing. It believes that it will attract a wider range of investors, create more liquidity in its shares and raise its corporate profile by making the switch. The move also will give it more potential firepower to issue shares to finance acquisitions. Some large institutions are precluded from owning AIM stocks. STB has nearly tripled in value since floating in November 2011. The lender’s shares rose 10p to £22.35 yesterday.
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