Galliford Try / Reckitt Benckiser

[monabri]

I was assessing GFRD as a potential HYP addition but was put off by a seemingly very significant increase in debt levels between Dec 2016 and
Mar 2017 (see below *).

I happened also to note a significant increase in debt levels for RB too which also occurred at the end of 2016.

The debt levels in both companies have seemingly been fairly stable until the end of Dec 2016.

Can any holders of shares in either company confirm/explain whether there were perhaps purchases of other companies, loans (for purchase of land banks in the case of GFRD)?

In short, are the debt level increases genuine?




(*) I was reviewing/assessing GFRD using a programme called "Simply Wall Street" which one or two people who contribute to the HYP boards use.
It indicated that

GFRD debt went from £159m to £760m in 3 months after being reasonably flat

RB debt went from £2389m to £17227m in the same 3 months as GFRD...the increases starting and finishing on the same days!! (year ends?)

[vrdiver]

RB bought Mead Johnson Nutrition (MJN) for around £17b, finalised in June '17, so throw in some disposals and debt reduction and that might cover it?

GFRD seems to be intra-year capital fluctuations. The 2017 annual results don't show the increase so I wonder where SWS get it from (or S&P Capital IQ, as that's their source)?

Perhaps a more analytical lemon will be along shortly!

[77ss]

I was assessing GFRD as a potential HYP addition but was put off by a seemingly very significant increase in debt levels between Dec 2016 and
Mar 2017 (see below *).

....
In short, are the debt level increases genuine?
....

GFRD debt went from £159m to £760m in 3 months after being reasonably flat....

There is debt, and there is debt. So the answer is yes and no.

GFRD's average net debt for the year ending 30/6/17 was £240m - whereas their year end figure was net cash of £7.2m. For an average to be so much higher than the period end figure will mean that at some point in the year, the debt will be even higher - so £760m is plausible.

The conventional explanation is that it is a seasonal business - and exactly the same pattern was reported in the previous financial year.

There are some concerns over GFRD, but I don't see that debt is one of them - but DYOR.

I hold.

[Wizard]

Monabri

Because companies can manipulate year end debt figures I tend to look at interest cover now. Looking at WSJ it shows cover of 8.85 times for GFRD, but not sure which year this covers.

Terry.

I also hold.

[Gengulphus]

Having looked at Galliford Try's reports for the last five years, I can confirm that the net debt variation seems to be a regular seasonal pattern:

2013: £58m at interim, £14m at final
2014: £86m at interim, £5m at final
2015: £36m at interim, £17m at final
2016: £96m at interim, £9m at final
2017: £114m at interim, -£7m at final

And cash flow generated by operations has a similar regular seasonal pattern:

2013: -£59m in H1, £53m in H2
2014: -£40m in H1, £92m in H2
2015: -£2m in H1, £41m in H2
2016: -£28m in H1, £105m in H2
2017: -£51m in H1, £157m in H2

Turnover in those ten half-years went £678m, £789m, £804m, £964m, £1085m, £1263m, £1182m, £1313m, £1235m, £1427m. Those figures don't at first sight have a seasonal pattern, but if you chart them, there's a bit of a zig-zag quality to the chart. That can also be revealed by looking at the percentage increases between them: +16.4%, +1.9%, +19.9%, +12.6%, +16.4%, -6.4%, +11.1%, -5.9%, +15.5%, which show a distinct tendency for the odd-positioned (H1-to-H2) increases to be larger than the even-positioned (H2-to-H1) increases.

I think the explanation is probably the fairly well-known tendency for people to buy houses in the spring, but actually building them is more of a year-round activity for a housebuilder. So they tend to build up their stock of completed houses a bit in H1 (which a bit confusingly is actually the second half of the calendar year for Galliford Try, due to its June 30th financial year end), absorbing cash, and then sell it down a bit (or at least build it up more slowly) in H2, releasing cash.

I haven't seen any evidence of 'massaging' the debt figures, unless one counts the choice of financial year end as such. And that's been unchanged since at least 2005 (I've got the annual and interim reports back that far - but there are limits to how many I'm willing to look through for the sake of this post!), so if it is 'massaging', it isn't at all recent!

Gengulphus