Kingspan – Very good start to the year

Kingspan’s trading update reveals that it has generated revenues of €561m for the first four months of the year, which represents an increase of 8% on the same period of 2013.

Revenues on a constant currency basis were up 9% with the stand-out performer the core Insulated panels division (constant currency revenues up 16%).

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The statement also notes the acquisition of Dri-Design, a US high-end architectural facades business based in Michigan, for €23.5m. The business has annual revenues of circa $25m (approximately €18m), so it represents a bolt-on deal (US insulated panel revenues in 2013 were €146m, 8% of group). It is expected to complement the Benchmark product suite Kingspan already has.

Outlook comments suggest a “strong first half for the business” with activity levels “encouraging”. Based on the position after four months, Kingspan’s revenues need to increase 5.3% year-on-year (yoy) from May to December to meet our existing full-year forecast. Although the comparison base will become more demanding, this does not look overly onerous.

Insulated panel revenues rose 14% yoy between January and April, and were up 16% on a constant currency basis. According to the statement, this reflected progress in all key markets, the mild winter, penetration gains and market growth.

In Insulation boards, revenues were up 3% yoy, and also ahead by 3% on a constant currency basis. The UK market was described as “busier” while there was also an improvement off a low base in the Benelux.

Moreover, we understand that underlying trading is stronger than the headline revenue gain would suggest. Kingspan had a large timber frame contract in the UK in early 2013 and more recently it has focused on margin over volume in Ireland.

In relation to Kingspan’s less important divisions, Access floors revenues fell 9% (constant currency: -7%) as weakness in the US office sector weighed (with weather also unhelpful) while Environmental sales were stable (encouraging given revenues fell in 2012 and 2013)

Net debt at April 25th was €124m. This was up €16m since year-end, but includes the aforementioned €23.5m deal in the US. Hence on an underlying basis, Kingspan remains extremely cash generative (net debt at end-April 2013 was €165m).

Our current diluted adjusted EPS forecast for 2014 is 60c. This is based on circa 6% revenue growth and a 50bps improvement in Kingspan’s trading margin (incremental margin of around 14%). Our expectation is that volume growth will be helped by improving end-markets in the UK, the Netherlands and Ireland as well as further inroads in relatively new markets such as Australasia and the Middle East.

Our initial sense is that we will nudge up our 2014 trading profit forecast from €138m to circa €140m following the update, which will factor in the contribution of the Dri-Design business (which we estimate is a circa 10% trading margin business). This will likely prompt a circa 1c upgrade to our EPS estimate.

2014 should mark a fifth consecutive year of double-digit earnings growth. Earnings by the end of the year will have more than doubled from the trough. Even so, our anticipated trading margin of just over 7% for the year will remain a long way off the double-digit level we think is ultimately possible.