11th Oct 2023 14:39
(Alliance News) - Travis Perkins PLC was the worst performing stock in the FTSE 250 on Wednesday afternoon after the builders' merchant slashed its annual earnings guidance amid a slow down in the UK housebuilding, renovation, maintenance and improvement markets.
Shares in the Northampton, England-based company were down 7.0% to 749.00 pence in London on Wednesday afternoon. The wider FTSE 250 index was down just 0.2%.
Travis expects adjusted operating profit to fall between GBP175 million and GBP195 million in 2023. This is down from previous guidance of GBP240 million, provided in August at the time of its interim results, and down at least 34% from GBP295 million in 2022.
At the half-year stage, the company said its adjusted operating profit was GBP112 million on revenue of GBP2.47 billion, down 31% and 2.5% respectively from a year before.
Travis said revenue and like-for-like sales were both down 1.8% in the third quarter ended September 30 compared with the year before. It said the slowdown in the UK new build housing and the domestic renovation, maintenance and improvement markets seen in the first half continued into the third quarter.
In the Merchanting division, third-quarter revenue declined by 3.4% against the year prior, which Travis noted represented a "modest improvement" on the first half. It said this was driven by a 3.1% decline in pricing due to "strong deflationary pressures on commodity products which have significantly impacted on gross profit and margins". Volume was down only 0.3%.
The Toolstation business fared better, with revenue up 7.3% in the third quarter, including 4.4% like-for-like growth.
Russ Mould, investment director at AJ Bell, said the trading update showed that the cracks in the UK housing market are continuing to cause problems among suppliers to the sector.
"Weakness in the housing market has caused major ripples. A slowdown in new build housing means reduced demand for the products stocked on Travis Perkins' shelves," he said.
"After two years of companies moaning about inflationary pressures, we're now seeing deflation and some businesses are being caught out by a sudden drop in market prices. Among them is Travis Perkins which has found it has to sell existing stock for less to stay competitive, which in turn is hurting its margins."
Mould noted that Travis has also been hit by fewer people buying and selling existing properties.
"Moving home is typically a key driver to spend money on making the property look nice if you're a seller or making upgrades if you're a buyer. When activity in this area slows down, tradesmen find their work dries up and so there are fewer visits to Travis Perkins' depots," he explained.
For the AJ Bell analyst, the "only way" Travis can keep the tills ringing moving forward is to slash prices and make sure it is offering "superior service".
"The former implies lower profit margins and the latter suggests it might need more workers on the shop floor, pushing up costs. In this situation, Travis Perkins probably has no choice but to take a hit on margins – good for customers but bad for its financial results," Mould said.
However, Mould noted that there could be one potential saviour for Travis: a looming general election in the UK.
"Political parties have long used the housing market as a way to dangle a carrot in front of the public and creating initiatives to solve the country's housing crisis could be one way to win votes. Any action on that front could quickly improve the landscape for Travis Perkins," he said.
On Tuesday, the UK's opposition leader Keir Starmer vowed to spearhead a "decade of national renewal" if his Labour party returns to power after nearly 14 years in a general election expected next year.
In a keynote speech to his party's annual conference, Starmer pledged to "bulldoze" his way through restrictions on housing and rejuvenate the ailing economy through modernised infrastructure and support for green industries.
Back in July, UK Prime Minister Rishi Sunak and Secretary of State for Levelling Up, Housing & Communities Michael Gove laid out their long-term plan for housing, committing to an era of "regeneration, inner-city densification and housing delivery".
The plans included a package of reforms to start building on underused sites in high-demand regions.
Last week, Sunak rallied his ruling Conservatives for the next general election, positioning them as a force for change.
In a speech lasting more than an hour to the party's annual conference, he promised that the Tories would break the mould of the last 30 years of government.
"We will be bold, we will be radical. We will face resistance and we will meet it," he told delegates.
By Heather Rydings, Alliance News senior economics reporter
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