UK proves the weakest link for Grafton

Strong recovery by builders merchants Grafton in Ireland and the Netherlands was undermined yesterday by underwhelming figures from its key UK operation.

Despite the company warning in mid-July of a challenging environment ahead of the UK referendum on EU membership and fears for demand in the wake of the Brexit vote, analysts still seemed to be caught by surprise by results that undershot forecasts on both revenues and profits.

The problem for Grafton is that the UK accounts for about 70 per cent of its business, and double-digit growth in its Irish merchanting division year-on-year was unable to offset those difficulties.

Classifying the figures as “disappointing”, analysts said on Wednesday that they now see no prospect of like-for-like growth in sales for its pivotal UK merchanting business either over the remainder of this year or, more importantly, in 2017, after a summer trading period that was flat at best. And they warned that forecasts for both this year and next are likely to be marked down to reflect the more difficult trading environment in the UK post-Brexit.

Those difficulties were illustrated most starkly by news that Grafton is setting aside up to £20 million this year to cover restructuring costs as it closes an undetermined number of outlets in Britain, with chief executive Gavin Slark confirming that the Brexit vote had "galvanised" management to act now on weaknesses it had been aware of for some time in its UK business.

However, it's not all doom and gloom. Within the UK, Slark talked up the prospects of its expanding chain of Selco trade-only outlets, which he said now accounted for 20 per cent of UK sales, with higher profit margins than its more traditional UK business plumbing, heating and contracts businesses.

And elsewhere, there is strong optimism on prospects for the Irish and Dutch markets. Net debt is falling again and by more than expected and the group’s balance sheet remains strong.

Grafton will have to take time to reconfigure its estate but, despite the setback, it remains confident in its outlook. Beyond Grafton, the broader concern is what the figures reflect in terms of the post-Brexit UK landscape.