Edison Investment Research

Market Commentary - Housing, Infrastructure, Construction and Services

Market Commentary - Housing, Infrastructure, Construction and Services

New trading data this morning comes from Keller and Waterman and Galliford Try has confirmed a change in the board. Breedon has also confirmed last week’s news that the Hope acquisition has completed. The erratic pattern of stock moves is likely to be the norm for the next few months as the impact of the advisory referendum results are absorbed. The process of how Brexit will be achieved with the EU and within the UK democratic structure is not clear let alone the terms so uncertainty will remain. Actions this week by the BoE to support the level of activity in the economy will create some “noise” in the system of detecting Brexit effects. Depending on the accompanying statement any action by the BoE will most likely be taken as evidence that there is a slowdown on the way, which may have happened anyway, the pace of which is accelerated by the outcome of the advisory referendum. The ONS data showed that construction is in recession and we know that the “Three Hs”, Hinkley, Heathrow and HS2 are still being kicked into the long grass which is unhelpful for Construction

Market Commentary - Housing, Infrastructure, Construction and Services

Berendsen and Foxtons provide new news today to guide investors. The former is in line with peers in terms of H1 performance with 7% growth in revenue and operating profit (3% at CER) and of the revenue growth around half seems to be organic; the concern discussed below is that UK flat linen showed revenue growth of just 2% and the margin was down by a third at 6%. The stock has had a good run recently and weakish news on the UK will probably affect it. Foxtons shows the most extreme example so far of the “Short term uncertain/Long term really great” in its half year numbers to end June 2016. The expansion into the suburbs was to be funded by a buoyant central London market but unfortunately the latter was in far from good health in Q2 hence the revenue was down 3% and EBITDA was down 36%. The Q1 numbers benefited from the Stamp Duty changes of course and so the dip in Q2 was expected. The company insist it will proceed with its plan to get 100 branches around London, up from 63 currently but anecdotal evidence suggests the suburbs are unsure of the Foxtons style. More below.

What do amazon drones and BMX bikes have in common?

How civilian technologies are leading the defence industry

What do Amazon drones and BMX bikes have in common? The answer – the use of cutting edge ‘sense and avoidance’ technology, developed by the civil aerospace industry. Traditionally in the A&D sector, pioneering technologies were developed by the defence industry (funded at least in part by Government customers) and then used in the civil aerospace industry. However, as Governments looks to rein their spending, companies are developing new technologies for civil applications, which will then in time be used in the military sphere. The use of ‘sense and avoid’ technology by Amazon to step up its drone tests, and by British BMX cyclists in preparation for next week’s Olympics are timely examples of this.

Market Commentary - Housing, Infrastructure, Construction and Services

Plenty of news to guide us today and most of it is positive. Compass and Countryside have issued trading updates and Rentokil released its half-year results to end June 2016.  The mood switch was back again yesterday as despite poor construction sector data from the ONS in Q2 Interserve (up 7.6%), Kier (up 5.5%) and Galliford Try (up 4.2%) led the way. The reports from Taylor Wimpey (up 6.8% on the day) were positive. There is good reason to think that the mood will ebb and flow over the summer but if the trend to a soft landing from Brexit (or the momentum for Breverse gathers pace) continues then the cyclical stocks that have taken such a hit recently should continue to climb.

Brexit webinar - One month on

A month after the UK’s vote to quit the EU, markets are moving on. Despite the UK’s new Prime Minister committing to implement Brexit, global markets remain calm, even if sterling is still well below pre-referendum levels. Within the EU, aggressive Brexit rhetoric has given way to the realisation that a mutually beneficial relationship will need to be found between the UK, the EU and its member states. Early indications suggest a slowdown in the UK in some regards, but earnings estimates have only fallen modestly so far – and only in the most exposed sectors.

SDX initiation

Egyptian producers with development and exploration upside

SDX Energy (SDX) is a London/Toronto-listed company with interests in two producing onshore fields in Egypt. Crucially for a small E&P, it will be cash flow positive in 2017 and is unlikely to return to the market for more equity to develop assets. The current work programme (of new wells, workovers and water flood) could see a more than doubling of recoverable volumes and is both cheap and relatively low risk. Once this work starts to bear fruit (later in 2016/17), the low-cost production will put SDX in the enviable position of being able to largely fund development of exploration prospects, while giving it resources and operational credibility to add further assets in Egypt. Our analysis indicates that the share price is more than supported by current operations, giving upside potential for the near-term production increases we see as likely and free exposure to exploration upside.

Market Commentary - Housing, Infrastructure, Construction and Services

Taylor Wimpey and Capita have provided half year numbers this morning and Rentokil has announced a hi-tech approach to pest control, in collaboration with PA Consulting and Google.Yesterday we saw the mood switch towards relative safety (Mears was the leader up 1.8% with Compass and Rentokil close behind up 0.8% and 0.5% respectively) and real fear of the worst of Brexit outcomes (Interserve was down 2.8% and Galliford Try and Polypipe were down 2.2%). This scenario will play out most of the summer as there no answers on which investors can rely

The summer of hate

The impact of terrorism on the Aerospace & Defence sector

An article in the press today described the summer of 2016 as the “summer of hate”.  The relentless pace of the attacks has invoked terror into the minds of ordinary people and politicians have been forced to make frequent declarations of their determination to protect their citizens.  It therefore seems logical to me that the summer of 2016 will be one which shapes the near term future for Aerospace and Defence companies.

Market Commentary - Housing, Infrastructure, Construction and Services

Taylor Wimpey and Capita have provided half year numbers this morning and Rentokil has announced a hi-tech approach to pest control, in collaboration with PA Consulting and Google. Yesterday we saw the mood switch towards relative safety (Mears was the leader up 1.8% with Compass and Rentokil close behind up 0.8% and 0.5% respectively) and real fear of the worst of Brexit outcomes (Interserve was down 2.8% and Galliford Try and Polypipe were down 2.2%). This scenario will play out most of the summer as there no answers on which investors can rely. In the current uncertainty we might see a return to scenario planning, a vogue in the late 1970s, early 1980s which aided understanding of the range of outcomes.

Market Commentary - Housing, Infrastructure, Construction and Services

Carillion, Tyman and Victoria all have news today that might affect investors views on future price activity in the sector. The themes that Brexit has had not discernible impact yet on short term performance, that uncertainty levels are however greater but in the long term it will all be OK continue. The notion that everything will work out just as we wish, a recurring human trait endures but what each of us wishes is different! So caution is needed, as ever along with careful understanding of each stock.