Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
As we approach a bank holiday Easter weekend, how many people will be doing some vital spring cleaning ahead of their egg hunts? Dan Ekstein of the Liontrust Global Fundamental team takes a look at the UK repair, maintenance and improvement (RMI) market and picks his top three stocks for exposure.
The repair, maintenance and improvement (RMI) industry benefits from a relatively resilient and stable end-market. Demand is loosely linked to the housing market, but a decent portion of spend is non-discretionary and some counter-cyclicality is provided by a ‘don’t move, improve’ mindset. For instance, during the global financial crisis, volumes of RMI work fell by around 14% peak-to-trough versus around a 50% decline in housing transactions. So, whilst the UK consumer is facing into a period of belt tightening, we are relatively sanguine the home improvement market isn’t walking towards a cliff-edge.
We run the Liontrust Income Fund with an overarching philosophy that quality dividend investing works best. We look for companies operating in attractive underlying markets; with strong, improving returns on capital, underpinned by competitive powers – strategic traits that underpin potential for persistently high returns. Within the broader ‘home improvements’ market we invest in three companies with these attributes: Dunelm; Howdens; and, B&M. Each addresses a distinct sub-segment of the market, but with the common thread of a superior value for money proposition, which is helping them to win market share during these more straitened times.
Dunelm
Dunelm is the UK’s leading homewares retailer, with 11% market share. It sells from 180 out-of-town superstores and online. In recent years it has materially outgrown the underlying market; for instance, in 2022 we estimate it grew sales 16% in a market that was up only 3%. This is allowing it to take more than 1% of market share per annum. As the largest player in a fragmented market, Dunelm can achieve low unit costs across its value chain. It leverages its buying power through strategic, long-term relationships with suppliers (often on an exclusive basis) and shares these scale economies with customers across a range of 50,000+ innovative own-brand products via attractive prices across the quality spectrum of good, better, best. Although no longer involved in day-to-day running of the company, founder Sir Will Adderley retains a board seat and c.40% ownership. A founder mentality permeates the business, which is run with tight purse strings and a conservative, consistent strategy.
Howden Joinery
Howden Joinery is the largest UK kitchen company. It has over 25% market share and is more than twice the size of its nearest competitor. Howdens is notably outgrowing the underlying kitchen market, expanding at around 10% per year compared to an industry average of 3%. Its buying power and in-house manufacturing allow it to drive down unit costs, meaning it can generate much better margins than its competitors. It operates a ‘trade only’ model, meaning 450,000 loyal and satisfied builders act as a quasi-salesforce, consistently recommending Howdens to their customers. Marketing costs are therefore low, and expensive showrooms are swapped for lean trade depots. Traditionally seen as a fit for purpose option, Howdens is increasingly penetrating the mid-tier kitchen market, broadening its offer to include higher spec finishes. We are optimistic about the multi-year growth potential this can sustain.
B&M European Value Retail
B&M European Value Retail is a discount retailer, with a focus on general merchandise, homewares, garden and grocery. It is able to achieve very competitive price points by consciously focusing its assortment on a much smaller number of items than the large supermarkets, DIY stores and garden centres it competes with. As an ‘essential retailer’, B&M was able to remain open during the pandemic lockdowns and it attracted swathes of new shoppers. They liked what they saw and B&M’s stores are today achieving like-for-like sales more than 20% higher than pre-pandemic levels. This has improved B&M’s ‘sales densities’, which has driven margins to sustainably higher levels and created a virtuous circle: higher sales volume drives greater buying power, allowing B&M to lower prices, so attracting more footfall. In previous economic downturns discount retail models took market share – we expect history to rhyme this year.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
Investment in funds managed by the Global Fundamental Team may involve investment in smaller companies. These stocks may be less liquid and the price swings greater than those in, for example, larger companies. Some of the funds may hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio. Investment in the funds may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. Some of the funds may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.