Grafton plans to cull UK merchant branches as Brexit bites

Grafton Group plans to close "a number of branches" in its key UK builders' merchanting business at a cost of £20 million (€23.6 million) as it braces itself for a tougher construction market after Brexit, according to its chief executive.

The restructuring expense will cover redundancies, property costs and asset writedowns as the group tries to reposition its UK merchanting business, which accounts for more than 70 per cent of group sales, Gavin Slark, the chief executive, told The Irish Times on Wednesday after the company reported first-half results. He declined to say how many branches will be affected.

“We’ve said for a while that the plumbing and heating [business] has been most challenging’’ as margins come under pressure, Mr Slark said, adding that the UK referendum outcome has “galvanised” the group’s decision to “take decisive action now”.

Branches

Grafton, the third largest builders merchant in Britain with more than 400 branches, warned in mid-July that its sales in this business had dipped in June and that Brexit is likely to dampen demand for new housing and home improvements for the remainder of the year in its most important market.

On Thursday, it said: "It is still too early to assess the likely impact on the UK economy of the vote to leave the European Union. Following weak trading in June, demand in the UK merchanting business was relatively flat during July and August with markets remaining very price competitive."

Still, Grafton's UK trade-only Selco Builders Warehouse business stood out as a bright spot as it continued to post profit growth in the first half, as "smaller jobbing builders" benefitted from resilient levels of home repair and maintenance projects in Britain, Mr Slark said.

Shares in Grafton slumped as much as 12 per cent to £5.35 on Wednesday morning in London, marking its biggest sell-off since the Brexit vote in June, as analysts prepared to cut their earnings forecasts for the group.

Earlier on Wednesday, the company said its adjusted operating profits for the first half soared 12 per cent as strengthening Irish and Dutch economies offset weakness in its UK builders merchanting business amid concerns about Brexit.

Adjusted operating profit rose to £68.4 million from £61.2 million for the same period last year, helped by the €91.5 million acquisition late last year of a Dutch took distributor, Isero.

Challenging

“Against a backdrop of a challenging UK merchanting market and the associated start-up costs with a pick-up in Selco branch openings, we see full-year 2016 operating profit forecasts being reduced by circa 10 per cent to £131 million,” Robert Eason, an analyst with Goodbody Stockbrokers, said in a note.

“Revisions are likely to be larger for full-year 2017 as we start to incorporate slower growth across our merchanting coverage to factor in the potential impact of Brexit,” Mr Eason said.

Analysts at Investec said they expect consensus forecast for the group to fall by 8 per cent.

Meanwhile, Grafton said its Irish merchanting and Woodie’s DIY retailing business in Ireland performed well as the property market continue to recover and households spending increased.

The interim dividend approved by the board has been increased by 6 per cent to 4.75p, in line with its progressive dividend policy. Mr Slark said the company also plans to increase its shareholder payout for the full year.