Polypipe falls short of lofty expectations for 2018

Shares of Polypipe were knocked-off their perch after the company posted lower than expected full-year operating profits, but sounded a confident note on the outlook and bumped up its dividend.

For the 12 months ending on 31 December, the manufacturer of piping, plumbing and drainage systems for private homes, commercial and for civil and public infrastructure posted earnings before interest and taxes of £74.0m (Numis: £75.7m), for growth of 2% versus 2017.

Total sales meanwhile were up by 5% at £433m (Numis: £429m), boosted by the acquisition during the reporting period of Manthorpe Building Products and Permavoid, although excluding those two acquisitions, sales would have been ahead by 4.2%.

The company described market conditions "as mixed", even as it highlighted UK revenue growth of 5.9%, versus a Construction Products Association winter forecast for a drop of 0.2% for 2018.

Revenues in Residential Systems were up by 9.8% and by 8.5% in like-for-like terms, while in Commercial and Infrastructure they dipped by 0.2% for the full year but rose by 6.7% in the back half of 2018.

In terms of the outlook, group chief Martin Payne said Manthorpe and Permavoid were performing in-line with expectations and called attention to the long-term growth drivers that remained in place.

"We continue to see strong cash generation, and the long-term growth drivers of legacy material substitution and legislative tailwinds, together with our strong balance sheet, position us well for the future," he said.

On an underlying basis, profits before tax were up by 2.1% to £67.1m and earnings per share rose 4% to 28.1p (Numis: 28.2p).

The company's bottom line was hit during the period by increased sales into the lower margin homebuilding market and inefficiencies due to its operating near full capacity in certain areas which, combined, pushed the company's operating margins down from 17.6% last year to 17.1%.

As a result, the group's "organic EBIT drop-through on incremental volume only stood at 8% compared to the usual range of 30-35%," analysts at Numis explained.

However, company management expected investments made in 2019 to alleviate those production bottlenecks.

Year-end net debt rose by £15.8m to £166m or 1.7 times the company's operating profits (EBITDA) on a proforma basis, versus 1.6 times in the previous year.

Management proposed a final dividend of 7.9p per share, thus raising the full-year payout by 4.5% to 11.6p (Numis: 11.3p).

Following the lates set of results downgraded their recommendation for the shares from 'buy' to 'add' and trimmed their 2019 EPS estimate by 2%, but continued to sound a constructive note on the firm.

"However, we would not want this to be taken out of context, as our forecasts still suggest an 8% EPS CAGR over 2018-2020," Numis's Christen Hjorth, Howard Seymour and Chris Millington said in a research note sent to clients.

"Despite this, Polypipe trades on a CY20 P/E ratio of c.13x and yield of c.3%, and we therefore reiterate our positive recommendation."

Analysts at Peel Hunt did likewise, telling clients: " These issues have now been largely worked through and trading in the new year has started well with the group set to deliver further growth over the next few years.

"We are leaving our FY19 profit and earnings figures unchanged but, after a strong run in the shares, we move our recommendation to Add (from Buy)."

As of 1459 shares of the outfit were down by 6.29% to 405.40, albeit after having hit a 52-week high of 437.80 just the day before.