Construction and Services
Kier and WYG provide news to guide investors this morning, the former has released numbers for the year to end June 2016 and the latter its AGM trading update. Our indication of the EPS consensus for Kier, provided on Tuesday was a tad high and the number released today show EPS at 106.7p , 11% higher than last year’s 96.0p and in line with the 10% CAGR to 2020 promised two years ago.
Yesterday was a good one for the stocks most likely to be affected by interest rates. No buyers yet for Mitie which fell 3.1% at close to 187.1p and was the largest loser.
Kier and WYG provide news to guide investors this morning, the former has released numbers for the year to end June 2016 and the latter its AGM trading update. Our indication of the EPS consensus for Kier, provided on Tuesday was a tad high and the number released today show EPS at 106.7p , 11% higher than last year’s 96.0p and in line with the 10% CAGR to 2020 promised two years ago. Kier’s numbers are complex and include a substantial £140m exceptional charge, which was expected but nonetheless need some analysis. The residential and the property operations have performed well at Kier, albeit that property profits were lower on higher revenue and that, combined with good cash management, meant net debt has fallen £42m to £99m allowing the company to raise the dividend per share by 17% to 64.5p. Berxit has created no material impact on the business, we are told. WYG’s share price was hit post Brexit and is still recovering. The news today of a 35% rise in the order book to £157m along with strong trading in 1H16/17 should help the price get back to the 145p level reached in June, it closed last night at 116p. More below.
Yesterday was a good one for the stocks most likely to be affected by interest rates. Interserve was the best performer, up 3.1% to 397p and was up 5% at one stage. The numbers suggest that it is substantially undervalued, if we assume the Equipment Services operation remains as a continuing business. Galliford Try, Kier and Carillion also featured in the top half of the leader board so there was a bit of “Risk On”. The flip side of that was a lack of appetite for highly valued low risk stocks as Compass, Rentokil and Berendsen which all dropped a tad but by less than 1%.
No buyers yet for Mitie which fell 3.1% at close to 187.1p and was the largest loser. It was down over 4% at one stage. We expect to see more negative comment in the coming weeks so it may take a while to settle, probably not until the interims at best, unless there are personnel or other developments. The board meets only six times a year as a norm (Audit Committee three times) but there may be a step up in the pace if change is to be achieved and shareholders’ support regained. It is worth re-iterating that the company has some good contracts and relationships but has taken a little more contract risk than it should, relied a bit too much on acquisitions for growth and not quite invested enough in the existing operations, in our view. Matters have come to a head now. However our sense is that is troubled but nowhere near in a crisis, financial or otherwise.
Kier’s operations are complex so the numbers need careful interpretation. The residential operations, Kier Living, provided great strength in the numbers announced today with a 37% rise in revenue to £353m and an 81% rise in Operating Profit to £20.3m. The Construction operations had a good year with revenue up 17% and operating profit up 23% to £47.4m; the company had a good year of winning work in this segment and the order book was maintained at £3.4bn. The company’s progress in large scale jobs such as Crossrail and the Mersey gateway has proven to be a positive move for the business. In Services revenue rose by 34% to £1.6bn and underlying operating profit was up 50% to £86m. The only segment to show lower performance in 16/17 was property where the 40% rise in revenue provided a 6% fall in operating profit; the statement does not explain that change but focuses on the segmental ROCE at 23% and the prospects, which seem unhindered by Brexit and remain positive. So across the business the story is one of it being in good shape and the restructures of the Caribbean operations and the Environmental services contracts proceeding along with the sale of the Mouchel Consulting operations.
The meeting today will focus on three issues, the size of the exceptional and the implications for future earnings and cash outflow related to that number; the sustainability of earnings in residential and housebuilding; and Services segment earnings growth as the margins at 5.2% are not excessive but in the current climate are getting close to as good as it gets, despite the richer mix of activities created by the Mouchel deal. The company is on track for EPS of some 117p this year to sustain its 10% CAGR “promise” but it may be that the external factors are getting a bit tougher than anticipated so some caution is needed.
WYG has been anxious both pre and post Referendum to emphasise that its EU dependent operations are not dependent on the parent company being based in the EU. The message is starting to get through and the orders since 23rd June from Brussels make the company’s point. But the news today also shows the company expanding in the UK in the core operations and the recently acquired planning operations. WYG state that trading is in line but the positive tone suggests that the risks are on the upside but its a bit early in the year to be over confident.
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