Market Commentary - Housing, Infrastructure, Construction and Services
Speedy Hire has announced that it has acquired the brand, business and assets of Lloyds British Testing Ltd from its Adminstrator. As might be expected in the week before Xmas there is no scheduled news. But that does not mean things stop happening in terms of news flow. Today, in addition to Speedy’s announcement, we have news that a housing association is joining up with WELink in a JV to build six factories in the UK, each with a capacity to build 4,000 modular homes each year.
Speedy Hire has announced that it has acquired the brand, business and assets of Lloyds British Testing Ltd from its Adminstrator. Speedy’s release contains limited information on the business save that it has 200 employees, 12 offices and its pro forma adjusted EBITDA for the year to end December 2016. The accounts lodged at Companies House show that the company went into Adminstration on 24th November 2016. In 2015, according to its accounts the business is shown to have revenue of £20m (stable compared with prior year), operating profit of £0.7m, 342 employees (annual average) and 11% of its revenue was overseas. It may be that Speedy is buying only the main part of the business so the numbers are a bit different or changes took place recently. Its main trading activity is the inspection, certification and repair of lifting and rigging equipment. There are also further trading divisions covering the manufacture of lifting equipment, provision of training services and sale of spare parts.
In recent years Lloyds British has made several acquisitions and gone through a number of restructuring and reorganisations, expanding and then contracting. The reasons for it being in administration are not wholly clear but at the end of 2015 the group had a rising level of debtors due after one year at £3.7m (up by £0.5m compared with the prior year) and £4.3m of debtors due within one year. Net assets were £4.5m at end December 2015.
Lloyds British is said to have been in difficulties due to falling revenue and cost pressures caused by the dip in activity in oil and gas markets and overseas as well as its own restructure costs. To outsiders like ourselves it looks as though Speedy as acquired a potentially very good, long standing business (established in 1812), that has fallen into severe cashflow difficulties and failed to get support from its banks and suppliers. It would therefore be helpful for Speedy to explain how it intends to resolve the trading issues facing the business and which of the acquired company’s liabilities it has assumed and what level of debtors is outstanding. Clearly those considerations will have affected the purchase consideration but shareholders should want to know those details. There would appear to be no DB pension scheme and therefore no pension deficit.
In conclusion, the deal announced today by Speedy seems to be a very sensible strategic addition to the business in a niche area that has barriers to entry. It is consistent with a move we have detected away from the hire of commodity items such as picks and shovels towards specialised equipment. Investors should want to know much more financial data however as bargains bought from Administrators are not always a cheap and good value as they seem. It certainly appears from our reading that substantial management effort will be needed at British to integrate it into Speedy and more information on that might be helpful. The deal does not detract from the undervalaution of Speedy but this transaction may reduce some of the speculation around the business triggered by the Loxam/TVH/Lavendon saga.
As might be expected in the week before Xmas there is no scheduled news. But that does not mean things stop happening in terms of news flow. Today, in addition to Speedy’s announcement, we have news that a housing association is joining up with WELink in a JV to build six factories in the UK, each with a capacity to build 4,000 modular homes each year. China National Building Material Company (CNBM) will fund the venture. Modular building, especially in UK residential, has been the next best thing for some 20 years. But is has never taken off because to succeed it needs a supply chain and house builders have been reluctant to specify modular until they know one exists. The result has been that modular is typically more expensive than traditional build because of a lack of economies of scale. (There are many more Pros and Cons of course but not for a morning note). We may be approaching a point where modular comes of age as investment is starting to be made in capacity. This morning’s announcement, which amounts to production capacity of 25,000 units a year is substantial in the context of the UK producing 170,000 new dwellings last year and the government target of 250,000 units.
There are many sceptics regarding Modular build. Some will point to the announcement from WELink in January this year when the company announced a similar deal with CNBM to build 8,000 modular homes which has seen little progress. They will also point to recent delays for L&G and SIG in setting up new plants for modular components and failures in the area such as Redrow’s link with Corus to create steel frame housing.
Having said all of that most of the major housebuilders have a senior man looking at modular. Berkeley has used the approach at Kidbrooke Village and was very positive about the benefits of faster build times, in its recent results release. New segments of the market are well disposed to modular, such as PRS and in certain areas such as student accommodation it is the build method of choice. Persimmon uses its in-house Space 4 modules for around 35% of its current output.
There is no guarantee that modular will take off in residential construction. Build costs typically are higher at present in modular than in conventional and there is a mismatch between the economics of factory build and speculative build of 2/3 story homes by mainstream housebuilders. But the landscape is altering fast and new investment in modular build is happening. Call for more background if needed.
Interserve was the leader at COP on Friday pipping at the post Rentokil which got much support for its strategic moves with Haniel. IRV rose by 5.3% too 320p and RTO by 4.1% to 219p, having been just over 230p at one stage of the day. We also note that SIG closed up 2.2% to end the day at over 100p for the first time since early November when the CEO fell on his sword. Interserve and SIG are two of the more interesting stories in the sector for long funds. Both have seen difficulties in recent years and have temporary CEOs in charge as we wait for new appointments. The level of M&A in recent years is such that there is a reduced supply of experienced CEOs, such as Phil Bentley at Mitie, so searches are taking a while. Prising an experienced CEO from and existing situation is not easy and an FD stepping up to a bigger role in a new has its risks. In the cases of IRV and SIG (SHI.L) the platform for a strong business and share price recovery, in our view but much will depend on the top team appointees.
The losers on Friday, Wolseley down 1.1% and Homeserve down 0.6% showed small level of change which in part might be explained simply by the US$ strengthening post the Fed rate rise and is therefore slightly technical and certainly not fundamental.
Moves last week
The sector performed poorly last week falling slightly with only the Services segment showing a small positive move. The market rose by 0.8%. YTD the sector shows housing down 6.1%, Services up by 1.2% and he Constrcating and Materials index is up by 24% but the weighting of CRH in that is high so in effect the mena average is much lower at around a 5% rise. The market is up 10% YTD (FTSE350) and 12% (FTSE100)
The main faller last week was Carillion, down 4% as it faced negative broker comment focussed mainly on its balance sheet but also on its relative lack of growth. Thtwo are of course connected and its the balance sheet issues that have caused Carillion to be very cautious in recent years, both a strength and a weakness. The new FD has options to trigger a change in the situation when he takes over in the New Year.
SIG was the main gainer last week for e reasons we have highlighted in recent updates. Its expansion into panels and structures for the modular sector (see above) is an interesting addition to the recovery story in the mainstream operations. In a segment where bargains are difficult to find we sense that the risk/reward at SIG at 101p is quite favourable.
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