Market Commentary - Housing, Infrastructure, Construction and Services
Kier’s announcement today that it has won its rebid for Highways England Area 13 (Cumbria and North Lancashire) is good news. Rebids are usually tense affairs so its always a relief to win them. The sector performed well yesterday, ahead of the market which fell away slightly. The data show that the first quarter has usually been relatively positive for the sector. Whether it will follow the usual pattern next year is questionable given the prospects for inflation, employment and interest rates as well as the likely hiatus that invoking Article 50 by end March might create
Kier’s announcement today that it has won its rebid for Highways England Area 13 (Cumbria and North Lancashire) is good news. Rebids are usually tense affairs so its always a relief to win them. The new contract is for 15 years and is worth around £10m a year. Highways England is continually altering the work packages and these can now vary greatly by area. The current work packages are split into maintenance and response, capital delivery, design and specialist support services. The outcome is that several companies can claim to have Highways England contracts in the same area; they have but its different work packages. More below
Mears was the safe play yesterday and topped the table with a 5% rise to close at 460p with just 35,281 shares traded. Polypipe was perhaps more representative as it rose 4.1% to 321p on 533,139 shares traded. It is now at its highest level since it was hit by Brexit Blues on 24th June and fell to as low as 220p at one point. With around 27p of EPS expected next year the shares are trading at a more appropriate valuation and given expected growth in earnings the stock has more gains to make. The fallers yesterday were all down by less than 1% so mentions are not needed and there was no real pattern to the dips.
The sector performed well yesterday, ahead of the market which fell away slightly. The data show that the first quarter has usually been relatively positive for the sector. Whether it will follow the usual pattern next year is questionable given the prospects for inflation, employment and interest rates as well as the likely hiatus that invoking Article 50 by end March might create. Countering the macro factors valuations in the sector are currently not stretched and the international scope and scale of several services companies is a positive. The housebuilders were positive yesterday and that may become a trend, despite the factors indicated above, as current valuations are low anticipating a decline in volumes and process that may not happen.
The first quarter will be unusual in the UK given the alignment of so many uncertainties and recent data on house prices, employment and inflation. However, the pattern so far has been for the economic decision makers to be pragmatic, despite the strong ideological rhetoric of some of the “players”. The role of commenting on HICS stocks does not include economic soothsaying. But it is important to have a context and ours is that the economic weaknesses seen recently will not be damaging and that the “authorities” will use measures to accommodate disruption caused by Brexit and sustain UK economic growth. Comments on stocks here are against that assumption.
Kier has staged a strong recovery in recent months and is now trading near its 12 month high at 1394p; it reached 1411p earlier this month. The news today will aid sentiment even though the annual value of the contract is low given Kier’s size and scale. The recent “show and tell” to the City on Kier Living was well received and the projected outlook is credible. The company intends to invest substantially in its property and residential operations in te mid term; arguably in some parts of its services operations it has an optimum position and further share gains will be difficult. Also some markets are quite dull at present, especially Local Authority outsourcing and some are difficult but not impossible to break into, central government services for example. It is probably easier for Kier to grow profitably in UK property and residential at present and 15%+ ROCE is more readily available in those areas. Growth in Service and Construction is still possible, in our view but the markets are tough at present and the lead time on bids is long. With EPS of 107p expected this year, to end June 2017 and around 118p in the next year Kier seems to us to be getting near to being up with events. The dividend at 4.8% is relatively high and the track record is positive for investors. One of the key boosters in recent months has been the balance sheet which was aided by the proceeds of the sale of Mouchel Consulting. Keeping net debt on a falling trend is important to sustaining confidence at Kier.
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