Investor: Kingspan, which is one of the more dynamic mid-capitalisation Irish-quoted companies, with a market capitalisation of more than €1.7 billion, issued an upbeat trading update earlier this week. The company stated that it expected its full-year results to be ahead of market expectations.
As a result, investment analysts in the stockbroking companies have upgraded their profit forecasts for 2005 and 2006 by approximately 5 per cent. Not surprisingly, the share price rose sharply as investor sentiment towards the stock received a fillip.
The share price has been performing very well so far this year and the gains this week mean that the share price has now risen by approximately 50 per cent over the year-to-date.
Strong financial results for 2004 set the scene for a positive run in the shares and the take-over earlier this year of Century Homes, the timber frame housebuilder, gave further impetus to the share price.
Kingspan purchased Century for an initial consideration of €67 million and deferred consideration of a maximum of €24 million.
Century is the clear leader in the offsite residential timber frame construction market in Ireland. It has also established a foothold in the UK and Kingspan should be able to ramp up its penetration of this market.
Kingspan produces insulation products and other building materials in a variety of product areas. These include composite panels, insulation boards, raised access floors and environmental containers. These are fast-growing niches and the medium-term growth prospects are attractive in all of them, driven by legislative and regulatory changes as well as cost advantages and efficiency benefits associated with many of these products.
Kingspan has high market shares in its product areas in Ireland and the UK and it has a growing presence in continental Europe (including some eastern European markets) and the US.
In its trading update, Kingspan stated that sales are growing by 29-30 per cent, which is faster than prior broker forecasts of about 27 per cent. Profit margins have improved and the company expects the margin to come in at approximately 11.3 per cent for this year.
This improvement has been due to a faster-than-expected recovery of raw material price increases from customers, a stabilisation in raw material costs and the realisation of operational efficiencies.
The company also took the opportunity to update the market on the impact of the various IFRS accounting changes. It restated its 2004 accounts under IFRS and the result is that there is no material change to the reported earnings per share. There were minor changes of around 1 per cent in shareholders' funds and in earnings before interest, tax and amortisation.
Given the positive short and medium-term prospects for Kingspan it is not surprising that its share price has performed so well. Shares now trade on a 2005 price/earnings ratio (P/E) of just over 17 (based on a share price of €10.50), which is well above the average P/E of 14.7 for the Irish market as a whole and is above the P/Es for most companies involved in the building materials sector.
However, Investor takes the view that Kingspan is operating in product segments that offer much faster growth prospects at attractive profit margins than most traditional building materials companies, and therefore the company deserves a premium rating.
The issue for investors is whether this most recent gain in the share price has pushed the shares to a level where they have become too expensive.
Investor likes the medium-term prospects for Kingspan but is of the view that the current P/E is just a little too high to warrant investment at the current share price. However, Investor would view any pullback in the share price as an opportunity to invest in this fast-growing mid-cap Irish company.
