Market Commentary - Housing, Infrastructure, Construction and Services
Balfour Beatty provided a trading update this morning which is short and sweet and Bellway has issued an update ahead of its AGM for the first 18 weeks of the year. The BBY update is a bit of a tease really as it tells us that it has achieved the phase one self help targets for the Build to Last programme (£200m cash, £100m cost saving and a positive net cash position) but provides few numbers about Phase Two. Bellway talks of its start to the year being encouraging and cites a 7% increase in the reservation rate so far this year and continued good market conditions (mortgage cost and availability, low cancellation rates and HTB)
Balfour Beatty provided a trading update this morning which is short and sweet and Bellway has issued an update ahead of its AGM for the first 18 weeks of the year. The BBY update is a bit of a tease really as it tells us that it has achieved the phase one self help targets for the Build to Last programme (£200m cash, £100m cost saving and a positive net cash position) but provides few numbers about Phase Two. The original programme launched on 17th February 2015 talked of getting the business to industry standard performance levels and today the release talks of hitting industry standard margins over the next 24 months. We shall ask for clarity on what the company thinks they might be as the standard margin in some segments is and should be much higher than the 2% norm for general construction. Certainly history shows that PPP/PFI projects generally deliver much higher margins than say, regional construction. But even a 2% margin on £8.5bn of revenue should deliver around 18p of EPS (based on a 25% tax rate and £5m net interest cost). Investors should want to know what BBY thinks the industry margins are in each part of its operations, we suspect it’s more than 2%. More below
Bellway talks of its start to the year being encouraging and cites a 7% increase in the reservation rate so far this year and continued good market conditions (mortgage cost and availability, low cancellation rates and HTB). The company indicates that full year completions will be around 5% higher than in 15/16 and that so far sales prices are in line with expectations. There are some caveats, which is a sensible approach at present, around consumer confidence being maintained. Bellway has taken advantage of the post Crash era to grow its operations and it believes it is now able to deliver 11,000 new homes a year. It stopped buying land post Referendum but has since re-entered the market though as with others has asked land developers and sellers to sharpen their pencils so margins on the end product can be maintained or improved. We are hearing of some of the larger housebuilders seeking 30%+ net margins as the hurdle rate for new land purchases.
So with the housebuilders you have to take a view on one issue, are good market conditions likely to persist through next year. Certainly with current levels of rising population there are good reasons to beleive that demand will grow and there is no immediate pressure to raise interest rates or reduce mortgage availability. The housebilders balance sheets are far more robust now than they were ten years ago and industry consolidation is not a topic that is discussed that much. On the other hand it is quite plausible that employment levels could start to fall and that many financial services firms could leave London as it may just take too long to sort out the Brexit terms. It may also be that talk of interest rate rises could be more frequent which unnerves some potential buyers. We remain optimists about the housing markets as at every stage the current Government has softened its stance when pushed on Hard or Soft.
Mitie had a positive day on Monday rising 5.8% to close at 225p. The only new information was the terms of Ruby’s departure, which some may have understood to mean that that a further provision may not be needed. Alongside the new CEO’s purchase of £3.6m of shares in the business outsiders may see some evidence mounting but we are unsure it’s a sound conclusion. We have been clear, we hope, that Mitie was a good operation in its field but profitability was overstated and promises in contracts about improvements were tough targets in many cases. It is realistic to believe that by 2018 the new top team can create an operation with £2bn annual revenue, 4-5% margins and c 20p+ of EPS and with good growth prospects, and that the dividend can be maintained.
Capita was the back marker gains down 5.3% to 454p. The changes announced in the update last week were probably too few and too late and clarity in terms of the detail behind the plans will not be known until the CMD in the middle of next year. Arguably the new Chairman has had very little time to sort out what he wants and needs a few more months. As some grey beards might say the CMD will come soon enough as time flies. But in the meantime the share price will struggle and on current form FTSE100 exit seems inevitable which will create churn as well. There is no sense of a looming financial crisis and teh arguments to buy, even at 454p are weak but they exist and if Institutional investors are uninterested there are others who might take an interest, at this level or with a 20-40% premium.
There is much talk of increased funding via the Council Tax to pay for improved care for older people. Mears is the main quoted entity in the area but it should be clear it does not run Care Homes, which is the main focus of attention in the press. It manages Care budgets on behalf of some councils and operates Care services related to supporting independent living for the elderly and disabled. Its customers are Local Authorities, Charities and the NHS. So additional funding into the Care segment will aid Mears, we believe. The company is restructuring its operations at present so it works with organisations that are focussed on outcome-based contracts. More funding into the area will help Mears and will be good news for the business in the long run. Mears was the second largest faller yesterday, down 3% to 432p which we believe was just the ebb and flow of trade and the impact of just 11,070 shares traded.
Back to BBY briefly. The statement this morning confirms what the data has been saying for some time and the £200m cash part was achieved last year and the £100m cost saving always seemed to be an easy target. Contract wins since the new top team took office suggest that it is starting to pull its weight in the sector, in the UK and USA and to take work that suits its size, scale and knowledge base. We believe that margins of 3-4% are possible across the company with a blend of some at 2% and many at 5%. That level of performance and the backing of the PPP/PFI portfolio suggests that 274p is probably on the low side as a target for the mid term and that 350p is realistic as a 12 month target
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