Positive IMS; revenues up 33% in first four months of the year and operating margins held
12 May 2011
FACTS: Kingspan has revealed that the group's revenues in the first four months of the year rose 33% (revenues of €439m, up from €330m in the same period last year). The CRH acquisition chipped in 13% of the increase, implying organic growth of 20%, which is split as follows: foreign exchange +2%; pricing +6%; volumes +12%. Kingspan also notes that operating margins are flat year-to-date and that it expects a first-half result "favourable" compared to that of H1 2010. Hence operating profits for H1 should be at least 10% above the first half of last year.
ANALYSIS: The year-to-date performance compares with our full year forecast of a 23% increase in revenues, so Kingspan is ahead of our expectations. Reflecting our expectation that CRH would be earnings-neutral, we are currently forecasting a 80 basis points fall in the group's EBITA margin for the year so the flat result for the first four months is clearly positive.
By division, revenues in the first four months are as follows: Insulated Panels up 27%; Insulation Boards up 74% (16% excluding the CRH business); Raised Access Flooring (RAF) was flat; and Environmental & Renewables up 21%.
We consider the performance of the Insulated Panels as being particularly strong, reflecting what appears to be a very solid performance in the UK, good growth in Germany and Australia and market share gains in the US. Only Central-East Eastern Europe was subdued, with trading patterns "erratic". Kingspan does note that the division's order book at end-April was only modestly ahead of April 2010 so the 27% growth rate recorded in the first four months will not be sustained.
Elsewhere, we understand that the CRH deal is bedding in well and the net acquisition cost has been reduced to €105m following €15m of disposals. Kingspan is therefore halfway towards its disposal target of non-core assets. A flat result in the RAF business is well ahead of our full year expectation of a 20% decline in revenues. Lastly, in Environmental & Renewables, Kingspan clearly achieved a very strong top-line result in the first four months of the year, although it does admit input price pressures are affecting margins.
On outlook, Kingspan notes that steel costs are likely to flatten and that chemical prices may do so later on in the year. Our understanding is Kingpsan's previous guidance on cost inflation – and recovery thereof – remains unchanged.
DAVY VIEW: This is a positive statement from Kingspan, although the first four months were flattered by an easy comparison base. The forecast adjustment bias is clearly on the upside on the basis of the group's start to the year. For example, were Kingspan's operating margin for 2011 overall to come in unchanged, results would be over 15% better than what we are currently expecting, other things being equal.
The Kingspan share price has, like many other building product companies, underperformed this year on worries over the impact of rising input prices. Our view has been that greater visibility on price management and integration of the CRH deal was needed before we changed our 'neutral' rating. Evidence on both so far is positive and this should help the stock recover at least some of its underperformance. We are therefore changing our short-term rating to 'outperform'.