Market Commentary - Housing, Infrastructure, Construction and Services
Xmas may be near but there is still an amount of activity to note. Civitas Social Housing has announced that it has spent a further £15m of the £350m equity it raised recently to buy 25 leases on 17 supported living properties. Has anyone noticed that US financial businesses are buying up UK contractors?
Xmas may be near but there is still an amount of activity to note. Civitas Social Housing has announced that it has spent a further £15m of the £350m equity it raised recently to buy 25 leases on 17 supported living properties. The initial yield is 6.5% and the company has yet to leverage the equity which will improve the yield. Tritax Big Box REIT has announced that it has exchanged contracts on a £102m investment in two distribution facilities at Raunds in Northamptonshire which are pre let to Howden Joinery on 30 year leases. Tritax has said the new facilities, when completed in 2018, will bring very significant operational and efficiency benefits. Tritax will get an initial yield of just over 5%. Howden has said nothing this morning though a new 650,000 sq ft facility at Raunds was mentioned at the half year results. Forecasts for Howdens show weaker earnings performance next year, based in part on the company’s own observations on its markets. Howden’s share price has settled in a band of 360-380p having had a 12 month peak of 520p in late December last year; the profit warning in late June triggered a sell-off. Looks like a new update is needed.
Has anyone noticed that US financial businesses are buying up UK contractors? First Reserve bought Morrison Utility Services a few months ago and in the last week has snapped up civil contractors Dyer and Butler. Morrison had annual revenue of around £600m when it was bought and D&B’s was £120m. Add in Cathexis buying ISG atthe turn of this year and there may be a pattern emerging. Of course it’s not key US contractors that are doing the buying but financial operators seeking high ROCE. And, presumably as financial operators an exit, at some point, in needed. It could be just a coincidence of course but three deals in one year is unusual and Cathexis implied that it is seeking to add to ISG.
It may be that UK investors know something US ones do not about the industry OR are the US money men seeing something others are missing? We can build a rosy picture for the UK’s prospects and perhaps outsiders are showing a level of clarity that domestic companies are missing. As we know contractors usually make good earnings on most projects but from time to time there are some really bad ones that spoil the overall numbers. Risk management has improved significantly in the sector in recent years but current results still reflect some poor projects taken on as long ago as 2012. Perhaps the US acquirers believe they can manage risk and with payment terms much improved, from the contractors’ perspective in the last 12-18 months, ROCE can be very positive.
Moves yesterday were almost entirely upwards in the 22 stocks in our universe. But the moves were subdued, reflecting the time of year. The sector improvement of around 1% was ahead of the market which staged a late rally to end up 0.3%. The first quarter is usually a good period for the sector, as have said, so perhaps there is a bit of early buying. Eight stocks in our universe of 22 have fallen by more than 20% so far this year and among that group there may be room for strong improvement this year. Certainly in the cases of the Merchants (SIG, Grafton and Travis Perkins) all down by around 30% so far we expect to see support emerge as the impact of restructuring shows through. While we have had serious concerns in the past about SIG, due to trading and accounting issues, we suspect that at 100p the shares have substantial recovery potential, if the right new permanent CEO is appointed soon and builds confidence swiftly.
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