I recently bumped into a roofer that I was acquainted with. By bumped into, I mean we were both picking through the contents of a skip parked outside a building site in a part of East London.
A posh Georgian-era townhouse in an enclosed square with a garden at its centre, just off the Mile End Road, was being gutted by a building firm. Whoever owned the property had obviously been watching Grand Designs as everything was being thrown out, from garden furniture to turf. I had spotted some nice-looking terracotta pots that were mostly unbroken. My roofer mate was combing the detritus for offcuts and bits of fairly new wood flooring and decking that had been ripped out.
I asked him what he was doing, and he looked at me like I was the Village Idiot and said: “’Aven’t you seen the price of wood? Bloody goldmine this is!”
The cost of building materials – especially timber – has been steadily rising over the past five years. In the UK, there’s been a surge in demand for timber on the back of a boom in housebuilding and the (no doubt Grand Designs-inspired) trend towards timber-framed construction.
Demand spike, supply contraction
At the same time as demand jumped, supply contracted for several reasons. The Coronavirus pandemic of 2019-2020 saw sawmills close globally, therefore disrupting global finished timber supply chains. Just as the world came out of lockdown, Russia and Ukraine squared up and the ensuing war – from a region of the world which has vast forests and is a significant part of the global timber supply chain – meant that a big chunk of timber supply was taken out of the chain.
Specifically, in the UK, Brexit added to supply concerns, as after Britain left the European Union, it became more difficult and more expensive to import timber from Europe. In developing countries, the rapine and plunder of natural resources highlighted the destruction of forests as a cheap source of wood for rich countries and supported by intergovernmental bodies – and public opinion in the developed world – many developed countries (for the right financial considerations) started actively regulating logging, which again exacerbated the tight supply of timber to global markets.
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Although not unique to the construction industry, over the last year the cost of production and transportation of timber, due to inflation, rising energy prices and a lack of freight drivers has also steeply increased – unfortunately you can’t just stick a stamp on a log in Brazil and expect it to get to the UK.
All in, since 2019 the cost per square foot of timber has increased by over 40%, according to Forest Research’s Timber Price Index. To put that into context the FTSE All-Share Index went up by 12.8% over the same period. Effectively, if you had bought a GBP100 timber sleeper in 2019 and left in in your garage, you could easily resell the same sleeper for more than GBP140 today.
It’s difficult to say when timber prices will start to come down again, the War in Ukraine is likely to continue to disrupt supply chains and keep prices high for the rest of the year. However, with Chinese, US and Canadian sawmills coming back online (at least for softwoods) post-Covid, North American and Chinese supply should start to replace timber from Russia and the Baltics (albeit with higher transportation costs).
On the demand side, should the cost-of-living crisis continue during 2023 and into 2024, it is likely that housebuilders will start to slow down building new properties, and consumers will put off renovation projects until the financial environment becomes more positive.
Howdens Joinery emerged from MFI Furniture in 2008
One company that has had to deal with the issues relating to the supply and pricing of timber is FTSE350-listed Home Improvements Retailer, Howdens Joinery LON:HWDN. Howdens emerged from the fitted-kitchen giant MFI Furniture Group Plc, which collapsed into administration in the last major financial crisis of 2008. The Howdens unit subsequently became a standalone business, selling fitted kitchens, joinery supplies and hardware products.
Since MFI disappeared in 2008, Howdens has been on a rising growth trajectory. Today, Howdens Joinery is the UK’s leading supplier of kitchens, joinery, and hardware products to trade customers. The company has over 800 depots across the UK and France, and it serves a wide range of customers, including kitchen fitters, builders, and developers. The company also has a growing presence in the Republic of Ireland and Belgium.
In 2022, the company reported GBP406m profit before tax – up GBP16m on 2021, with revenues of GBP2.3bn. The London-based retailer commands a 27% share of the to-trade fitted kitchen market, manufacturing its products Cheshire and Yorkshire in the UK, as well as supplying trade customers with hardware and joinery supplies.
Muted but positive performance
In its last results, published in July, the company followed a very good 2022 with a slightly more muted, but still positive performance. On the back of a storming previous year, Howdens increased first half revenues by 1.5% to GBP926.9m, but saw operating profits fall 21.5% to 117m, which was coupled with a 21% fall in EPS. However, looking over the longer term, when compared to pre-Covid results, the joinery company was up 43.3% in terms of profit before tax and up 42% in terms of group revenue.
The company’s slightly disappointing operational profit was a result of the company investing in new depots and manufacturing techniques, and an increased cost in sales and distribution, coupled with inflation that was exceptionally sharp in terms of energy and labour outgoings. This also cut into the company’s cash reserve which shrank 52.8% period-to-period to GBP117.8m.
The company’s reserves were also affected by a GBP50m share buyback programme, dividend payments of GBP87.8m, pension scheme deficits and a build-up of inventory for the post-summer period. The company expects the second half of 2023 to be an improvement on 1H23 as the company traditionally experiences better trading numbers post-August.
Andrew Livingston, chief executive said: “We are delivering value to our customers at all price-points as we continue to gain market share and we are well set up for further success in the second half, which includes our Autumn peak trading period. The combination of more local depots in convenient locations, an ever-stronger product line-up, first-class service and high stock availability, continues to represent a compelling proposition for our customers. While we are cautious about the short-term macroeconomic outlook for our markets, we remain confident that Howdens will make good progress in 2023 and our full year expectations are unchanged.”
As reported last year The Armchair Trader noted that Howdens valuation was well-below the average for the last decade. Whilst admitting that Howdens was a cyclical business, the company was quite robust.
Howdens Joinery opened the week at (25th September) at 740.7p. Over one year the share price has appreciated by 40% (the same as that bit of 2019 timber) and year-to-date has put on 27%. After buying back 7.3 million shares, the company announced an interim dividend for 2023 of 4.8p/share an increase of 2.1% year-on-year to be paid on 17th November 2023 to shareholders on the register on 13th October 2023. Shares ranged over a 52-week period between 472.2p and 766.6p. The company a market cap of around GBP4.1bn.We’re not sure how much more room there is for the company’s shares to move north from here with analyst consensus forecasting profit before tax of GBP347m for 2023 and GBP380m for 2024. However, Howdens is a well-managed company that has consistently been profitable, is focussed on the trade bracket and if the housing market picks up, should blossom.
On the other hand, Howdens isn’t the only game in town. B&Q part of the Kingfisher Group LON:KGF through its aggressive TradePoint outlets and Wickes LON:WIX are also players in the market, and have the ability to start a price war to capture Howdens market share. All of them would be hurt by continued weakness in the property market with many small contractors dealing with their own cost-of-living crisis; not least the price of a bit of wood.
