SMALL CAP IDEA: Lords Group Trading at the forefront

Shanker Patel knows Lords Group Trading (LON:LORD) from the bottom up.

“I was the student who worked there while I was studying and studying law,” says the director of the specialist distributor and retailer of construction, plumbing, heating and DIY items.

When the time came to qualify as a lawyer or move into the firm proper, he chose the latter. “There were times when I wondered why I’d gone this route when I was working behind the counter in shops with no heating, or lugging pots of paint.”

He’s at the very top now, but it seems those formative experiences have shaped the way the Lord’s boss has developed the company as a company that invests in its people. It is one of the company’s three ‘P’s’ that form the basis of its success.

Lords Group Trading supplies construction, sanitary and heating goods to traders

The others are factories and buildings. Judging by the branch I frequent, the property has come a long way since Patel shuddered behind that counter. They are light, airy and the complete antithesis of the traditional high street hardware store.

‘To stimulate growth, you inject investments; but it doesn’t always have to be an investment in capex [capital expenditure]’ says the CEO of the Lords.

‘Investing in your property and people sometimes yields the best reward. But we know that because we are in a pretty operationally heavy business – distribution, wholesale and retail, there will always be investment in our necessary factories and machinery and, of course, in digital [infrastructure].’

I speak with Patel at a critical juncture in the company’s 35-year history, one that should accelerate its growth trajectory.

The IPO of Lords’ London Stock Exchange is expected to value the company at 150 million. Crucially, it will provide management with $30 million in cash that will fund a mix of organic and acquisition-led expansion.

The goal is to nearly double the turnover from 288 million today to 500 million by 2024. At the same time, Patel and his team aim to increase the net return on sales from “to 5 percent” to the 6 to 7 percent enjoyed by larger operators such as Travis Perkins.

The latter target provides the potential future reward for investors who join the IPO, the Lords CEO believes. ‘That 200 basis point delta’ [two percentage points increase] between where we are now and where we want to be, that’s really the advantage for anyone who wants to invest in this company.’

Worth: Lords’ London Stock Exchange expected to value the company at 150 million

Lords has scaled up when it bought its plumbing and heating business and is looking at additional deals to complement its self-generated growth and help boost its all-important net profit margin. To date, it has completed 11 trades.

Negotiations normally begin in a similar vein, which speaks to the emotionally intelligent way the Lords team conducts business. They start with lunch. It may sound like a loosely casual way to start conversations about a transaction costing millions of pounds, but there is a method for this approach.

“You give respect to the salespeople for what they’ve created,” says Patel of the practice.

“Generally speaking, these are owner-managers who may have family in the business. There may be five things they want to discuss with us before we get to the price.

‘You do that at lunchtime; you have a conversation. You discover what really matters [to the vendor]. You have built a relationship. And that relationship, if it starts well, makes the transaction easier.’

The potential sleeper in the Lords business is the online operation, which at just under 10 percent of sales still represents a fairly hefty $25 million in annual revenue and is “growing rapidly.”

“We’re not just what you see online. We’re online in the store,” Patel says.

“The problem with a purely online business is that it’s a one-time transaction with a customer. The thing with us is that you can trade with us online and in store, on the phone, by email, whatever channel you use, you can use it. But then we are local in our fulfillment.’

Patel says the city’s feedback on a round of talks with investors ahead of the IPO has been positive. Those funds and institutions likely to take a stake have dug into the vision and ethos as well as the financial projections.

With a free float of 34.5 percent of the shares – that is, the percentage of shares not owned by committed long-term holders – Lords will still ostensibly be a family business.

But as Patel points out, some of the world’s best and largest companies are based precisely on the family equity model. US retail giant Walmart is dominated by the Walton clan, while luxury goods group Richemont and Nike also remain under the control of the founding families.

“We are a family business and professionally run,” says Patel. “Professionalism is everything to us. But we’re not just driven by a buck; we are driven by doing things right by all our stakeholders.’

The shares will begin trading on July 20.