Market Commentary - Housing, Infrastructure, Construction and Services
There is little news of note this morning but three items are worth bearing in mind, in our view,Firstly, RICS has become a little more positive about UK house prices in 2017 and indicates that a 3% rise is likely, the second item of interest which is that Telford Homes has announced it third Build to Rent venture in conjunction with M&G, Thirdly, JLIF has invested £42m to buy a 6% take in a project to deliver 27 new trains that will run on the Great Western line from next year onwards, in stages
There is little news of note this morning but three items are worth bearing in mind, in our view, Firstly, RICS has become a little more positive about UK house prices in 2017 and indicates that a 3% rise is likely, driven mainly by the mismatch between supply and demand. The view is driven by a lack of new homes coming to the market and the increased concentration of home ownership among older people who move less often than younger home owners, thereby reducing the availability of second hand stock.
That is good news for UK house builders and relates to the second item of interest which is that Telford Homes has announced it third Build to Rent venture in conjunction with M&G, which will build 125 open market homes and 67 affordable homes which are pre sold to a Housing Association. The increased relevance of PRS schemes is a notable feature of the market at present which is altering not only the way people fund their accommodation needs but potentially also the way they are built; PRS properties will have a higher propensity to use modular and prefabricated factory built components than conventionally built properties, for speculative sale, made by the mainstream housebuilders.
Thirdly, JLIF has invested £42m to buy a 6% take in a project to deliver 27 new trains that will run on the Great Western line from next year onwards, in stages. The deal involves higher than normal returns for JLIF reflecting that it is making the commitment during the construction phase but the levels are not mentioned in the release today. JLIF has the right of first offer on the remaining interest in the project currently owned by John Laing Investments. This investment is bang in line with JLIF’s altered mandate and much of the release is focussed on aspects of the deal that indicate risk levels are not high (trains to be built and maintained by Hitachi, design life is 35 years but concession period is 27.5 years). The Infrastructure funds have been highly resilient in the post Brexit hiatus, as might be expected and despite a lack of easy wins in the UK the companies have continued to dig out projects in which to invest at low risk and with potentially good returns.
Moves yesterday were in a tight range typical of a pre Xmas downwards shift in volumes. The best performers were Morgan Sindall and Mears up 2.0% and 1.3% respectively but shares traded were 2.940 and 10,421. Morgan Sindall is undervalued in our view as the company has signalled that earnings growth and cash are likely to perform well in the future, given current order books and that the legacy projects are settled in all respects. The recent evening for investors and analysts was helpful. Management was very upbeat across all sectors. While there may be concerns that Fit-Out could dip a little from its current high level of activity we expect that margin improvement in some areas (Construction and Infrastructure) and revenue growth and margins gains in others (Partnership Housing, Property Services) will fill any gap. And Fit-Out may not dip! A short 80p of EPS is expeceted this year, with a very cautious approach to profit recognition and near 90p for next year and the data points to the dividend being a tad higher than the consensus of 32p a share, in our view.
Progress at Mears in terms of restructuring of the Care operations is progressing to plan and in social housing the strategy of having a broader offering is yielding results. The company has been highly resilient in Social Housing, compared with many rivals and some of that success is due to its well developed systems. The IT in Social Housing provides data needed to support the operations which is then used to create the accounts, it is primarily an operational system not an accounting system. We have no doubt that the accounting numbers are accurate, that has never been an issue for Mears, the point is that the granularity of the data for each job, in all aspects and the control it provides goes some way towards understanding the company’s success. Importantly too it has adapted it strategy to cope with the changing market and now has a much broader offering that includes an increasing amount of higher added value projects. At 447p and with 32p of EPS this year (lower than the “norm” due to restructure in Care) and 38p next year the stock remains solid and there are many reasons to be very positive.
Polypipe was the back marker, down 3.9% but we believe it was a simple retrace of recent gains and signals nothing about future direction. The market is positive about Polypipe at this level and given the outlook in the UK and its own efforts to improve we expect it to deliver 27-28p of EPS next year, justifying a higher share price than the current level.
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