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Halfords - full year improvement, ordinary dividend reinstated

Sophie Lund-Yates, Equity Analyst | 17 June 2021 | A A A
Halfords - full year improvement, ordinary dividend reinstated

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Halfords Ordinary 1p Shares

Sell: 315.60 | Buy: 316.60 | Change 9.20 (3.00%)
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Full year revenue rose 13.1% to £1.1bn, reflecting growth across the core Retail business, and a double digit increase in Autocentres. Underlying cash profits (EBITDA) rose 46.7% to £139.8m.

A final dividend of 5.0p was announced. The group plans to reinstate an ordinary dividend of 9p from FY22, and intends to follow a progressive policy going forward. Ongoing uncertainty means Halfords will prioritise balance sheet health, investment for growth, and acquisitions ahead of shareholder returns for the foreseeable future.

The shares fell 3.6% following the announcement.

View the latest Halfords share price and how to deal

Our view

Halfords performed exceptionally during the pandemic. A 13% boost to full year revenue isn't something many businesses - especially those with a bricks and mortar presence - can boast.

While its status as an essential retailer and the staycation boom are tailwinds outside its control, we think that performance highlights fundamental strengths the group has built over recent years.

Servicing an unprecedented boom in cycling revenue over the year is a triumph of inventory management. That's been helped by the rapid shift to online sales, which rose over 100% for the full year.

Given the increased importance of digital sales it should be no surprise the physical estate is being streamlined - with an additional 42 stores closing last year. Remaining stores are increasingly focused on delivering what online rivals can't: click & collect services and a face-to-face service from an employee who knows what they're talking about.

Physical service is jewel in Halfords' crown. That's never truer than in its Services offering. The success of the new "Mobile Expert" offer, which sees Halfords technicians come straight to your door, is testament to what the combination of the right product and staff expertise can achieve if delivered at the right time in the right place. The offer is in its infancy, but growth is impressive and has the potential to keep expansion ticking over while also encouraging cross-sell into the Autocentres themselves. The fact both Autocentre MOTs and Mobile Experts can be booked directly from the retail site should help the group make the most of its large retail customer base.

We're also reassured by the fact the balance sheet is in good health. Significant free cash flow means the group has a net cash position. While that financial strength does mean the ordinary dividend is back on the table, surplus cash will first be funnelled to protecting the balance sheet and investing for growth. That means dividend growth is unlikely to shoot the lights out.

We're supportive of that move though, because plenty of uncertainty remains. Supply constraints, and the impossibility of mapping post-social-distancing demand patterns, means caution is sensible.

Overall Halfords is starting from a far sturdier base than some peers, and its end markets have shown considerable resilience so far. We think the mix of online sales portal and real-world expertise is a winning formula long term. That should help it should survive the turmoil engulfing much of the retail sector. We've noticed an increased air of caution in management's commentary though, so we think there could be some ups and downs in the short term.

Halfords key facts

  • Price/Earnings ratio: 15.5
  • 10 year average Price/Earnings ratio: 11.7
  • Prospective dividend yield (next 12 months): 2.3%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full Year Results

Retail revenue of £1.0bn was up 9.4%, ignoring the effect of closed stores, or 14.6% on a like-for-like (LFL) basis. That was entirely driven by Cycling, which saw LFL sales up 54.1%, although performance was held back by supply constraints. LFL Motoring sales fell 12.1%, largely reflecting fewer car journeys and low consumer confidence. An additional 42 stores were closed in the period.

Gross margins improved slightly from 48.2% to 48.3%, largely thanks to improved profitability from Cycling. Underlying operating profits rose from £54.1m to £91.4m.

Acquisitions helped revenue rise 31.6% to £252.5m in Autocentres. The group's grown its market share despite the reduction in traffic and MOT related business. 20 sites were acquired in the year. The business acquisitions meant gross margins fell 4.4 percentage points to 61.1%, largely reflecting lower gross margins in some of the acquired businesses. Underlying operating profit more than doubled to £9.8m.

Underlying free cash flow, which ignores acquisitions, was £145.3m compared to £54.6m last year. £36m of the improvement is related to Retail inventory levels, and this benefit is expected to reverse. The group had underlying net cash of £58.1m (2020: net debt of £73.2m).

Halfords' maximum net debt to cash profits ratio is 1.0 times, or 1.5 times for short term M&A activity. Because of ongoing uncertainty, Halfords said it will "operate with more prudent debt levels in the near-term".

Halfords expects pre-tax profit of over £75m in the new financial year, including the effects of accounting changes. However, the group's mindful of ongoing difficulties. There are still "acute" supply challenges in Cycling, and trading patterns are very hard to predict as social restrictions unwind.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.