E-Commerce Margin Pressures And Boiler Reliance Will Slowly Ease Amid Gradual Earnings Improvement

Catalysts

About Lords Group Trading

Lords Group Trading is a U.K. building materials distributor operating Merchanting, Plumbing and Heating, and Digital channels serving trade and retail customers.

What are the underlying business or industry changes driving this perspective?

• Although the integration of CMO gives Lords immediate scale in online building materials sales and access to national drop-ship capability, the structurally lower gross margins in e-commerce and the risk that cost savings that can be achieved in practice are limited could cap the uplift to group profitability, constraining margin expansion and earnings growth.
• While long term demand for energy efficient heating and renewable solutions supports growth in Ultimate Renewables and Air Source Heat Pump design and supply, the heavy reliance on gas boilers for about 80% of Plumbing and Heating revenues and uncertain policy execution around decarbonisation may slow mix shift, delaying improvement in divisional margins and earnings resilience.
• Although specialist Merchanting brands such as George Lines and Advance Roofing are positioned to benefit from multi year infrastructure and commercial projects, the lower inherent margins in civils and roofing and the possibility that volumes in the repairs, maintenance and improvement market do not recover to 2019 levels could limit operating leverage, tempering revenue growth and EBITDA progression.
• While Lords has strengthened its balance sheet, reduced net debt and preserved ample facility headroom to fund acquisitions, the strategy of selective M&A in a fragmented market risks overpaying for targets or underachieving synergy plans, which could dilute returns on invested capital and weigh on future earnings per share.
• Although the group is investing in digital capabilities to improve efficiency across Merchanting and Plumbing and Heating, the construction sector’s slow adoption of online channels and the execution challenge of harmonising systems and processes may prolong the payback period, limiting near term improvements in working capital intensity, net margins and cash conversion.

Assumptions

This narrative explores a more pessimistic perspective on Lords Group Trading compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Lords Group Trading's revenue will grow by 7.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.5% today to 1.2% in 3 years time.
• The bearish analysts expect earnings to reach £6.8 million (and earnings per share of £0.0) by about December 2028, up from £-2.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, up from -16.2x today. This future PE is lower than the current PE for the GB Trade Distributors industry at 14.4x.
• The bearish analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.19%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Repairs, maintenance and improvement activity remains structurally weaker than pre 2019 levels. If RMI demand does not recover as hoped, Lords long term growth could slow, which could pressure group revenue and limit operating leverage driven gains in earnings.
• The ongoing transition away from gas boilers toward renewable heating may accelerate in the medium to long term. With around 80% of Plumbing and Heating sales still linked to boilers, any faster than expected policy shift or consumer adoption could erode divisional revenue and net margins before renewables scale sufficiently.
• CMO and other digital initiatives operate in lower margin online building materials and e commerce segments. If intense price competition or higher fulfillment costs persist, the structurally weaker gross margins in digital could dilute overall profitability and constrain improvements in group earnings.
• The strategy of selective M&A and network expansion is being pursued in a still challenging and competitive U.K. construction market. Overpaying for acquisitions, failing to realize expected synergies, or opening branches in slower growth regions could depress return on invested capital and weigh on future earnings.
• Recent sale and leaseback transactions boost liquidity in the short term. Over the long run, higher recurring rental obligations and potential upward pressure on property and transport costs could offset operational gains and limit improvements in net margins and free cash flow generation.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Lords Group Trading is £0.35, which represents up to two standard deviations below the consensus price target of £0.53. This valuation is based on what can be assumed as the expectations of Lords Group Trading's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £0.65, and the most bearish reporting a price target of just £0.35.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be £563.9 million, earnings will come to £6.8 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 13.2%.
  
• Given the current share price of £0.23, the analyst price target of £0.35 is 33.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.