Market Commentary - Housing, Infrastructure, Construction and Services
The main formal news this morning comes from the battle for Lavendon in which formal documents have been published. We know three things from the economic data today that we did not know yesterday. The conclusion from the above is not startling. The outlook for 2017 is uncertain and the trends in the data point to growth being weaker next year than in 2016 and the risk on the downside for current forecasts is increasing.
The main formal news this morning comes from the battle for Lavendon in which formal documents have been published. TVH has made no further announcement to the release yesterday indicating that it is considering its position and that its 205p offer should no longer be regarded as final. In the meantime Loxam is cracking on with the formalities of shareholders accepting its recommended 220p offer.
Civitas Social Housing has made some early investments having raised £350m equity recently. It has bought 25 year leases on 29 supported living properties with an initial target net yield of 5.8%, unleveraged. The consideration for the deal is £65m. The vendors, two Housing Associations are likely to recycle the funds into new developments. The covenant for Civitas is strong, a key element of its appeal to investors, as the rents are underpinned by the relevant Local Authorities.
Speedy Hire and Severfield go XD today with interim payments of 0.33p at the former and 0.70p at the latter.
We know three things from the economic data today that we did not know yesterday. US interest rates are higher and the signal is that more increases are on the way next year. The Council of Mortgage Lenders data for October shows that the housing market is slowing with lending 11% lower in the month than in October last year and 8% lower than in September. And employment in the UK fell by 6,000 in the three months August to October compared with the prior three month period. Taken in isolation the latter two factors are not significant and can be explained away as being within the margin of error. But a picture of a slowdown is starting to build which may have happened in any event but could be exacerbated by Brexit uncertainty.
Three other pieces of data are useful guides, Centrica will now spend £900m this year on capital investment rather than the previously expected number of £1bn; the reasons for the reduction are not stated. But lower capex is a feature in many companies at present given the uncertainty of the Brexit terms. And UK households are now spending a record low for their mortgages at 17.4% of household income for first time buyers and home movers. At a time when 90% of loans dwellings are fixed rate the proportion of income spent on mortgage costs is sticky but longer term will increase, especially if real incomes show slow growth. Finally, the Barbour Index of Construction deals completed in November showed a fall of 30% compared with last year to £5.5bn; the residential sector was the main area with £2.1bn of all deals. The November figure included the Tees £650m renewable energy plant in Cleveland.
The conclusion from the above is not startling. The outlook for 2017 is uncertain and the trends in the data point to growth being weaker next year than in 2016 and the risk on the downside for current forecasts is increasing. It’s far from a disaster scenario but investors are likely to be highly cautious and that in itself can be self fulfilling.
Capita has at last seen some support and rose 5.2% yesterday. At 476p the stock is cheap, if it does not need new equity. The guidance of £515m PBT translates into around 56p of EPS so the current price discounts quite a bit of more bad news. Assuming the CAS operations are sold then EPS of nearer 50p is more likely. The key issue is that the recent update did not answer enough of the key issues and, aside from the Chairman, it’s the same team at the top. It is probably still too early to get too enthusiastic. Balfour Beatty gave back some recent gains and was the largest loser, down 3.1% to 271p; the stock remains in a tight 260-280p range so the move yesterday was not significant. Given the prospects for market demand and margin improvement the mid term picture is much brighter than the current price suggests, in our view
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