Stock Spotlight: Howdens

Hi. My name is Simon Denison-Smith. I'm a professional stock picker, and this is why we've selected Howdens Joinery for the Alliance Witan portfolio.

Howdens Joinery is the UK market leader in kitchen manufacturing distribution. It's about a 10 billion sterling market and consists of the cabinets that you have in a kitchen, worktops and appliances.

We particularly liked its unique business model. Kitchen retail has been a difficult place for investors. Indeed, Howdens itself was spun out of MFI, which then collapsed in 2008.

The founder of Howdens, Matthew Ingle, identified a unique way to distribute kitchens by partnering with the trade, i.e builders. He recognised that builders needed quality stock that was available when they needed it, and that it was efficient to install.

So rather than setting-up expensive high street showrooms, he set-up a network of out-of-town depots with warehouses that were big enough to hold that stock and car parks big enough for the builders to access it. He also created his own manufacturing plants that enabled him to control the quality of the cabinets, and delivered those pre-constructed rather than flat-packed.

We interviewed over a dozen builders and invariably they either predominantly or exclusively sourced their kitchens from Howdens. You can see that in market share. Over 30 years they've got to a position where 1 in 3 kitchens installed in the UK is a Howdens kitchen.

So one of the particularly attractive features of this company is that it's less cyclical than its peers because it services the refurb market rather than the new build market which tends to be more cyclical.

Another attractive feature of our investment in Howdens is valuation. Although optically it looks slightly on the expensive side on a cyclically-adjusted basis we believe it's good value, particularly with the levers for growth that it has available to it.

This brings me on to the final feature of our investment case, which is growth. Management have identified that they can add another 130 depots in the UK to the 870 they already have.

In addition to that it is growing successfully in Ireland and France. They also have an opportunity to build-out their product range and they're doing this.

Builders clearly have a scope which is beyond kitchens and they're building products for the bedroom, the study and for bathrooms.