Attractive fundamentals, battle-hardened management and downside resilience are the perfect ingredients to achieve sustainable capital appreciation.

Lords Group Trading (LORD)  fits the bill. Indeed, this UK builders merchant and plumbing/heating distributor has not only expanded historically much faster than its peers, but also cultivated a highly entrepreneurial and customer centric culture, which acts as key differentiator in winning greater share from its larger rivals.

Indeed in today’s "resilient" trading update, the company said that it had delivered FY23 adjusted EBITDA (post IFRS16) and PBT of £26.6m (£30.0m in FY22) and £11.0m (£17.4m) respectively on sales up 2.8% year-on-year (-1.2% LFL) to £463m (£450m in FY22).

Impressively too, net debt declined £9.5m in H2'23 to £28.5m (vs £38.0m in June) - or <1.5x EBITDA, pre IFRS16 - on the back of tight cost control, operational efficiency, and an inventory unwind (re boiler supply chain normalisation).

Going forward, I expect net debt to continue to fall given the cash generative nature of the business - with FY24 adjusted EBITDA coming in broadly flat year-on-year.

Meaning at 43p, the stock offers substantial potential upside - trading on multiples of 5.5x EV/EBITDA (pre IFRS16) and 7.8x PE, alongside paying a healthy 4.6% dividend (2p) yield. All underpinned by £15m of freehold property and an approx. 8% free cashflow yield.

But that's not all.

45% of turnover derives from the economically more resilient repair and maintenance sector, where millions of UK properties still need modernisation. Elsewhere, the group is widening its renewable energy product range (eg air source heat pumps) in order to help families save money and meet the country’s decarbonisation goals.

Sure, demand across the UK building product industry may be temporarily 'subdued', coupled with price deflation. Yet equally, this will not last forever - whilst LORD has successfully operated in such conditions many times before and knows which levers to pull.

CEO Shanker Patel commenting: "Our scale and profitability in both Merchanting and Plumbing & Heating have benefitted from our organic growth levers as we build our geographic footprint, extend our product range and build our digital sales expertise. We maintain an ongoing ability to execute earnings enhancing M&A, but balance sheet discipline remains a core consideration. In that regard it is pleasing to report net debt reduction ahead of market expectations. As market conditions improve we are confident that we are exceptionally well positioned for growth."

Ok, so how much is the stock worth? Well to me, looking across the economic cycle – I believe LORD can readily achieve £25m of Pre-IFRS16 EBITDA over the medium term. Which on a modest 6x-8x multiple, would be equivalent to a 70p-100p/share fair value. In comparison, Cavendish have a 106p price target.

 

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