Market Commentary - Housing, Infrastructure, Construction and Services
One curve ball already in the dead period around Xmas (HSS Hire’s £13m fund raising) and yesterday Bovis Homes delivered another in the form of a warning that output will be around 180 units lower than previous guidance, at around 3,975, in the year ending December 2016. The other news was that Loxam has stretched its wallet a tad further for Lavendon and is now at 260p per share with its offer. Again this is reported in the press so few additional comments are needed.
One curve ball already in the dead period around Xmas (HSS Hire’s £13m fund raising) and yesterday Bovis Homes delivered another in the form of a warning that output will be around 180 units lower than previous guidance, at around 3,975, in the year ending December 2016. It is reported in the press so no need for detail here. To discover this just six weeks after the last update, which pointed to a 5% volume rise on last year shows one of the reasons why its rating is low versus peers. The thrust of the statement is that it’s not a market issue as such, as the “Bovis 180” are sold, just not completed. The data released this morning from Nationwide shows house prices rising 4.5% on a year-on-year basis in December compared with 4.4% in November so the evidence remains that low interest rates and lack of supply are still factors pushing up prices. But we are talking about an ASP in the UK of £205,898 in December 2016 which does not buy much inside the M25.
The move to more southern exposure has been a tough one for Bovis as its supply chain is just not embedded and, we suspect, that is a factor behind the failure to complete. That, along with chains breaking down in the market as the houses concerned, we understand, are not generally first time buyer ones. In the past housebuilders have helped with part exchange but that is not a strong feature in the current market. It may be needed in some parts of the London market as buyers are getting nervous about employment prospects in the post Brexit era.
The Bovis announcement makes no assurance about catching up on the 2016 shortfall in 2017 so the loss of sales this year looks at present to be enduring. The 180 will be sold but there is no assurance that 2017 will see a rise in volume on previous expectations for 2016. Backing the housebuilders at any stage is a macro call and our sense is that it’s right to be positive at current levels. But the better action is at the lower end of the market and outside London. So stick with Redrow, Taylor Wimpey and Gleeson.
Two other pieces of news yesterday were reasonably predictable. One was that G4S completed the sale of its Utility Services operations for £52m in cash to First Reserve, a US fund noted more for investing in upstream energy sector activities than downstream areas such as those served by Morrisons Utility Services (bought in July), Dyer and Butler (bought on 23rd December) and now G4S Utility Services. They must be seeing something UK funds do not. For G4S this is good news as it reduces net debt though the transaction is earning dilutive based on publicly available data. The Utility Services operations of G4S have improved substantially under the new top team but some of the business is on a declining trend, manual reading of domestic meters and the consideration reflects that, rather than the £7.7m of operating profit in 2014 and the £6.4m achieved in 2015. The business has entered and is active in the smart meter market and has the largest industry data flow capacity so it provides a serious platform for First Reserve and as the jargon goes, “will be a better parent than G4S”, as the latter sees its main markets in international security and cash management markets. This news seems to have been ignored in the press.
The other news was that Loxam has stretched its wallet a tad further for Lavendon and is now at 260p per share with its offer. Again this is reported in the press so few additional comments are needed. Rival bidder TVH offered 251p on 23rd December in response to Loxam’s then best offer of 250p. Five days later Loxam has now delivered what it probably hopes is a knock-out blow. So for the third time Lavendon directors recommend a Loxam offer, the first time at 220p, then at 250p and now at 260p. Outsiders can never know what goes on inside a deal but for the Directors to get an offer 18% higher than they originally recommended it is a bit strange. The Insititutions are showing no inclination whatsoever to accept even 260p, which is right, as it is barely higher than the long term trading valuation of hirers at 6x EV/EBITDA. The price at close last night is saying it’s not over yet as it was 263.5p.
We should not attach too much importance to yesterday’s moves though the best performer Serco might object! It closed at its best level since April 2015 at 144p, up 1.9%. The early December CMD presentation was an excellent exposition of the company’s strategic position and of its “promise” to shareholders. There is no recent case of a company presenting its strategic stance with the utmost clarity and failing to get a good response from shareholders and investors. Examples include Rentokil, G4S (to some extent), Wolseley and Compass. Berendsen and Travis Perkins have been detailed and transparent as well at CMDs, which initially got very good responses but profit warnings caused their above average valuations to throttle back somewhat. BRSN is now 100p higher than its 774p low reached a few weeks ago and it may now be seeing a mature reaction that reflects more accurately the small scale of its warning. The same may be true of Travis Perkins which closed last night at 1464p compared with an early November low of 1357p.
Capita was the largest loser yesterday, down 0.8% to 516p. Some support was starting to return but management does not seem to have the very strong whiff of coffee that it needs. More of the same but more caution in risk management is not really good enough as a strategy in a world where large international rivals can invest much more than Capita in R&D and customer care. And waiting until mid year for the detail is not what investors want to hear. Maybe there is some more structural stuff to do at board level with the new Divisions. There is no need to rush to invest in Capita but the stock could rise as traders seek to make a short term gain.
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