Market Commentary - Housing, Infrastructure, Construction and Services 10th May 2017
The interim numbers from Compass and trading updates from Michelmersh Brick, Barratt Developments and Marshalls are the attention grabbers today in the HICS sector. Shareholders in Compass will be pleased to see the company performing well in the first six months with organic revenue growth at CER of 3.6% and margins up by 20bps but the main eye-catcher will be the proposed 61p a share special dividend expected to be paid in July along with the 11.2p of interim payment. Carillion was the leader of the pack yesterday as it rose 5% to 226.5p. The stock goes XD tomorrow with a dividend payment of 12.7p so the rise yesterday on 10.5p was proportionate.
The interim numbers from Compass and trading updates from Michelmersh Brick, Barratt Developments and Marshalls are the attention grabbers today in the HICS sector though the warning from John Wood will cause some distractions for read across, especially as it is mid negotiations to acquire Amec Foster Wheeler.
Shareholders in Compass will be pleased to see the company performing well in the first six months with organic revenue growth at CER of 3.6% and margins up by 20bps but the main eye-catcher will be the proposed 61p a share special dividend expected to be paid in July along with the 11.2p of interim payment. We are pleased to see the return of cash, in this case £1bn, being made via a dividend rather than a share buy-back which has been the main method used to date. The geographic split of performance is familiar with the US performing very well with 7.1% organic growth in revenue at CER, Europe with 2.3% organic revenue growth and the Rest of the World (RoW) slowing with 6.6% reduction in revenue as Brazil and Offshore & Remote had continued weakness. The issues in the areas of decline are being addressed and adjustment being made to the cost base and methods of operation. FX has affected the reported results considerably with revenue 20.3% higher in the statutory accounts at £11.5bn and operating profit up by 24.6% at £877m, operating margin 7.6%. Net debt at the period end was down a fraction to £2.87bn, an £8m fall; free cash flow was £502m after £325m of capex and £46m of net acquisition/disposal spend. The special dividend looks affordable with only a small rise in net debt likely, after reinvestment in growth and it will remain below 2x EBITDA. The shares closed at 1593p last night and 73p of EPS is expected this year; forecast may rise a little this morning after a confident first half performance.
Michelmersh has made a short statement to coincide with its AGM. It confirms that trading is in line with expectations, based on the first four months of trading though no numbers are provided. The update suggests that all is well in the brick industry at present in terms of demand and pricing, confirming other indicators so it good read across for Forterra and Ibstock.
Barratt Developments has told us that trading YTD, 1st January to 7th May, points to the out-turn for the full year being at the top end of the existing range of expectations; that range was £675-£733m of PBT for FY 2017. The confidence arises from strong demand with total forward sales at 7th May up 12.7% on last year at £3.2bn equal to 12,822 plots and private sales up 21.7%. The company continues to buy land that meets the minimum hurdle rates of 25% ROCE and 20% net margin. Net cash of £600m is expected at end June 2017 so the cash return policy seems to be fully intact. Given the current political circumstances and the shortage of housing stock and the increasing consensus that UK interest rates are unlikely to rise during Brexit discussions the housebuilders look set for some very good trading results. The ending of HTB in 2021 on current plans is some way off.
Marshalls update gives a positive picture of trading YTD and the company hints at a forecast upgrade with references to increasing confidence about the full year out-turn. Revenue rose by 6% in the first four months of the year to £135m with a particularly strong showing in the Domestic market with sales up 13% and order books at 12.7 weeks compared with 10.9 weeks at end February and 12.4 weeks this time last year. With EPS expected for this year at 20p before the announcement today and the shares closing last night at 393p the stock would seem to be up with events, in our view. The valuation has positive read across for the main UK Brickmakers (Forterra and Ibstock) and Polypipe which have lower valuations despite having similar risk/reward profiles.
Carillion was the leader of the pack yesterday as it rose 5% to 226.5p. The stock goes XD tomorrow with a dividend payment of 12.7p so the rise yesterday on 10.5p was proportionate. Our longer tem view is that Carillion will resolve its balance sheet issues but it’s not a quick fix. Mitie was the next largest riser up just 1.1% to 240p on news of the new Chairman and a stronger emphasis than we have seen previously on the Connected Workspace idea. The company has mentioned the idea previously in city releases and it has some insights on its website regarding how it operates but the financial implications have not yet been indicated. We expect that on June 12th we will get the update on operational performance and penetration for the Connected Workspace and some idea of he expected financial implications.
The largest faller yesterday was Travis Perkins, down 4.0% to 1628p, perhaps due to Grafton’s update creating concerns about Plumbing and Heating markets in the UK Merchanting sector. The Merchants have seen strong support in recent weeks but TPK has been left behind a little as its updates have reflected there is still much to do in re-structure of the operations and the markets. Kingfisher’s (B&Q) statements about UK performance and the rise of competition from Bunnings (Homebase) are also concerns. The company does not have meaningful overseas revenues to offset some UK market concerns in the way that SIG and Grafton enjoy. With 112p of EPS expected this year the share price at close last night might is not out of line with the competition and does not suggest a valuation gap investors can exploit at present.
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