Edison Investment Research

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.

Market Commentary - Housing, Infrastructure, Construction and Services
Monday, 11 July 2016

There is no news news this morning of a formal nature. There is a newspaper story that G4S might have sold its UK ATM operations to IBM, a story not subject to a formal announcement today. The story implies that G4S will still perform the task of distributing the cash but that IBM will own the business. This comes a few months after the company stated that it wants to expand into providing cash services in Europe; that is still compatible with selling the business to IBM and retaining a role in distribution. G4S will tell us what is happening when it believes it has something to say we suspect but a bit of clarity soon might help.

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. The dust is starting to settle a little and comments on Brexit/Bremain will be more considered in the forthcoming half year results round. But it will be the end of this year before any real clarity emerges.

Friday last saw some relief from the severe downwards pressure on the sector Interserve rose 6.8% to close at 244p . In the absence of recent statements from the company about performance and the disposal of Kwikform the market has assumed the worse rather than that previous guidance is still valid. There is a track record of IRV management delivering surprises. If the guidance on numbers is still right then there is still time to wait for formal announcements as the stock is trading on 3.8x current year earnings and will pay an 11.1% yield (assuming the Glasgow loss is treated as exceptional and the Kwikform operation is continuing business). Morgan Sindall is struggling to find support and was the biggest faller, down 1.6% to 574p but on just 13,759 shares traded that is not really representative. The market may be more concerned than it should about MGNS and in particular its exposure to Fit-Out in London. News today of Real Estate funds waiting on the sidelines to invest in London should be encouraging, balancing to some extent the potential decline in European activities based here. Absent the Brexit vote MGNS would most likely be telling us it has really turned the corner at its forthcoming results and that is the key story. The Fit-Out operations undoubtedly work best in thriving London office market but a substantial portion of its costs are variable so it can downsize swiftly if needed. With c 75p of EPS expected this year, which is near baked in the shares look cheap but progress in 2017 might just be a lot slower than expected as Fit-Out projects are delayed due to Brexit

Last Week’s Moves
The sector has now firmly underperformed the market, as we have been suggesting will happen for some time. The sector is now down around 3.5% YTD compared with the market up by 3.5% (FTSE 350) and 5.6% (FTSE 100). Needless to say the housebuilding sector is showing the largest underperformance, down 3.7% YTD. The services segment is down 3.4% and Construction and Building Materials by 1.5%. Given the strong rises over the last three years among the housebuilders the fall YTD may come as a surprise but the dip has taken the relevant index down only to the level reached in February.

Galliford Try was the main faller last week, down 11% to 831p, its lowest level since February 2013. The update later this week may calm a few fears about its performance which we suspect is not as bad as the sell-off suggests. The lead reason for the decline will be the concerns about new build housing which might be overdone, especially in GFRD’s case given its geographic spread and that nearly all of its land is bought on contingent deferred terms. GFRD’s guidance on its future performance in private housing will be guarded in its update but we suspect the story will be very positive in Construction and in Partnership Homes. No surprise that Kier, which has similar exposure to Construction and Housing in the UK was the second largest faller, down 8.9% despite a very positive site visit last week and a good update. Both stocks look oversold at present.

We picked out Rentokil at 108p and on Friday last its closed at 203p, up 26.6% YTD and following a positive announcement about trading, new contracts and earnings enhancing acquisitions. The stock is not cheap at c 20x current years earnings but as with Compass and Berendsen it has become a highly consistent performer and management will not let you down. The current level may not be the best entry point but we suspect on a three year view buying will prove a wise move.

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.