Are Lords Group shares too cheap?
Momentum investing is popular with many traders. Yet it only works if the trend continues, and as we know prices don’t always move in straight lines.
GARP stocks on the other hand - those offering 'growth at a reasonable price' - are underpinned by sound economics, generating above average growth, sustainable profits and real cashflows. To find them I use two key metrics: the PEG ratio - the PE ratio/EPS growth - and post tax cashflow/EV yield. Typically anything on a PEG of less than 1x and yielding >8% is considered attractive.
( ), a specialist UK builders merchant and heating/plumbing products distributor is one share that fits the bill. And today the company said trading so far this year remains in line with FY22 adjusted pre-tax profit expectations of £16.0m (up from £12.4m in the previous year) on sales of £438m (FY21: £363m).
This translates into adjusted EPS of 7.7p (FY21: 5.5p) and post tax/capex operating cashflow of £11.4m, according to analysts at Cenkos Securities. They expect this to rise to 8.6p and £14.1m, respectively, in 2023.
That leaves the shares trading on a FY22 PE ratio of 10x falling to 9x 12 months' later, which translates into an average 2 year PEG of below 0.5x and an post tax cashflow/EV yield of 8.5%.
To me this seems far too cheap for such a well-run, entrepreneurial business that has successfully negotiated multiple economic cycles before.
As a case in point, today’s AGM statement also cited the Beaconfield site, which has thrived under Lords' ownership. Revenues there have increased from £2.5m to £8.0m over the past 4 years, thanks to its 3P’s (People, Plant, Premises) investment strategy.
Elsewhere, RMI - repairs, maintenance and improvement - activity (80% of Lords' turnover) remains robust supported by the need to upgrade ageing properties, decarbonisation and the shift towards premiumisation (put simply, nicer homes). And the government’s pledge to construct 300,000 new properties annually (up from around 200k today), ‘Build to Rent’ activity, recladding and greater infrastructure/warehousing spend as projects like HS2 and nuclear plants gather momentum will also drive further growth.
It's true that alongside inflationary pressures there is an ongoing industry-wide domestic boiler shortage. But Lords is offseting this through a combination of internal efficiencies, operating leverage and price increases, thus protecting overall EBITDA margins of 6.1%
So how much is the stock worth? Well adding all this up, I would value Lords on a 15x FY23 PE ratio, equivalent to 129p/share. That would suggest potentially 67% upside against the current share price of 77p.
Chairman Gary O'Brien commented: "demand for Lords Group Trading's repairs, maintenance and improvement sector focused product offering has remained resilient, And not withstanding inflationary pressures and the current macro outlook, the Group continues to trade in line with market expectations."
"Boiler supply constraints persist in APP Wholesale, however underlying customer demand remains strong and indications support that the boiler supply issues will ease later in FY22.”
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