Edison Investment Research

Market Commentary - Housing, Infrastructure, Construction and Services

Lots of news this morning from the smaller stocks. Telford’s AGM statement, Lavendon and Workspace issued trading statements , and we have Bilby’s final results for the year to March 2016

Market Commentary - Housing, Infrastructure, Construction and Services

Speedy Hire and Barratt Developments provide trading statements this morning, the former quite concise and the latter almost eliminating the need to have a results announcement. Several strong rebounds yesterday saw Interserve rise 8.8% to 281.5p and Galliford Try by 8.4% to 956p. Carillion, Kier and Morgan Sindall all rose by 5%. The May Day bounce still leaves the stocks well short of pre Referendum levels but the short term risks clearly still justify caution at this stage. The issue for investors is whether the long term value of these stocks is altered by recent events and the likely course of progress in the sector.

Market Commentary - Housing, Infrastructure, Construction and Services

What a difference a May makes

Grafton and Galliford Try have updated, the former at its half year and the letter at the full year. What a difference a May makes. FTSE 250 up by 3.3% yesterday and the sector up by 3.0%. Brexit may mean Brexit but nobody has defined what the “B” word means. Galliford report in the early part of the conference call that the impact so far of the Referendum has been quite resilient and calcellation rates are unchanged.

Trumping Clinton on defence spending

A look at the potential impact of Donald Trump as President on US defence spending

“I’m gonna build a military that’s gonna be much stronger than it is right now. It’s gonna be so strong, nobody’s gonna mess with us. But you know what? We can do it for a lot less.” (Donald Trump)

Donald Trump is somewhat of an enigma when it comes to his military strategy. On the one hand he seems to have the US defence primes in his crosshairs. He frequently criticises politicians and defence contractors for colluding to build costly and unnecessary weapons systems, and he is determined to reduce the procurement budget. On the other hand he has spoken of wanting to increase troop numbers, buy new equipment and bolster the US military presence around the globe, particularly in the Middle East and China.

Market Commentary - Housing, Infrastructure, Construction and Services

There is no news news this morning of a formal nature. News is expected this week from Mitie at its AGM on Tuesday 12th and Galliford Try is expected to update at its year end; on Wednesday Speedy Hire has its AGM and Barratt Developments is due to update; on Thursday Workspace has its AGM and Lavendon and Telford Homes are due to update and rounding off the week Homeserve has its AGM but having updated recently its unlikely there will be new news.

Civil wars abating

Farnborough Airshow Preview 2016

Next Monday sees the start of the week long Farnborough Airshow which typically heralds a flurry of news in the sector. We expect the main talking points to be:

- A lack of headline grabbing aircraft orders

- Will Airbus and / or Boeing commit to a new aircraft?

- Airbus’ production issues to come under scrutiny

- F-35B to be the highlight of the flying display

- A focus on innovation

- Will Farnborough survive in a post Brexit UK

Market Commentary - Housing, Infrastructure, Construction and Services

Some signs of confidence returning

There is no directly relevant UK news released today. However Sodexo has issued it third quarter trading numbers, read across to Compass and others.
The price moves yesterday indicated that we may be starting to see some stability in the HICS sector with a glimmer of recovery though enthusiasm was not universal. The UK FM market has been of considerable interest to overseas companies and Sodexo has been one of the most successful. Others such as Emcor, Aramark and Elior are also taking a keen interest and there are some large private companies with £500m+ annual revenue in the space

Tullow - convertible bond issue

Tullow has announced it plans to raise $300m of convertible debt (maturing 12 July 2021, with an annual coupon of 5.875-6.625% paid semi-annually and convertible at 30-35% premium to VWAP on 6 July 2016). Given this proposed debt raise, it is worth re-examining the London-listed bonds for E&Ps and see how they have performed in recent months.

Can aerospace & defence weather Brexit

Impact of lower GDP growth on the aerospace & defence industry

I am a firm believer that GDP growth is the most important driver behind the health of the aerospace & defence sector. A strong economy increases people’s propensity to travel, and defence budgets are set as a percentage of GDP. I acknowledge that the two sides of the sector are both affected by a number of other factors (the oil price, new technologies, geopolitical tensions, etc) and both industries are global. However, the Treasury’s projection that in two years’ time UK GDP will be 3.6% lower than if we had remained in the EU forces me to pause for thought as to the possible impact of Brexit on the sector over the long term.

Housing, Infrastructure, Construction & Services

There is no relevant new news from the main HICS stocks this morning. The relevant items that attracted our attention are the two announcements from City Fibre that demonstrate that its model of the roll out of fibre optic cabling for broadband is getting traction.Serco was the leader of the pack yesterday rising 3.6% to 111.3p following its trading update. The update added nothing new but the general trend is that the company is on track and patient investors seem prepared to buy now and wait a few years.The ascent of RTO has been matched by the decline in the share price of the company that bought its IFS operation for a high price, Interserve. The main conundrum for HICS watchers is of course when to look again at the housebuilders.