Market Commentary - Housing, Infrastructure, Construction and Services - 10th November 2016
Grafton has supplied revenue data for the ten months to end October and commented on operating margins this morning and Bovis Homes has supplied a trading update. Balfour Beatty stormed ahead as the leader yesterday, up 7.3% to 281p, as the prospects for infrastructure spend in the US improved and trumped the reversal of the impact of $ strength on its reported numbers. The losers yesterday were the stocks with limited or no US exposure.
Grafton has supplied revenue data for the ten months to end October and commented on operating margins this morning and Bovis Homes has supplied a trading update. Firstly Grafton, which describes its performance as satisfactory and reading between the lines seems disappointed to have delivered 2.4% L4L organic growth in the first 10 months of the year in UK Merchanting, 3.6% for the business as a whole at CER. Given the difficulties in the UK market and the pricing pressure that is known to exist the performance looks pretty good to us and operating profit is in line with expectations. The expansion of the successful Selco format has continued with seven new stores in total this year bringing the total to 47 which will aid next year, as will further recovery in Ireland which showed revenue growth of 11.5% in the first ten months, at CER and L4L. Our sense is that Grafton is being a little hard on itself on reading this but equally may see a need to be cautious about the UK as trading conditions are price competitive. Revenue in the mainstream Merchanting operations grew just 1.2% in the four months to end October, implying that it picked up a little in September and October (based on comments at the interims)which for a team which sets high standards may be below best hopes but is still positive. It makes no comment on the potential for FX induced price rises on imported products which is a concern as short term hedges expire. More below
Bovis Homes dismisses concerns about demand and its trading performance. Though we note that along with Persimmon and we suspect a few others its land purchases have slowed with just 2,300 plots acquired YTD versus legal completion expected to be around 4,130 units this year (strategic land chipped in with a further 1,300 plots gaining consent, of which 1,000 are in Collingtree) . At several points in the text it emphasises that its land buying has been focussed outside London but also points out that it is seeking to grow in the South of England, which is consistent with strategy.. The message is clear! With completions expected to be up 5% this year and ASP 10% higher Bovis will deliver a strong performance. Tellingly however it says nothing about forward sales and performance for 2017 so there is some caution. More below.
Balfour Beatty stormed ahead as the leader yesterday, up 7.3% to 281p, as the prospects for infrastructure spend in the US improved and trumped the reversal of the impact of $ strength on its reported numbers. There are other reasons to be positive about BBY, in our view including the improved trading in construction, increased value of the PPP/PFI portfolio due to the likelihood of interest rates remaining low and inflation rising a little and a stronger balance sheet. The prospects for the company getting close to 30p of EPS by 2018 are improved and the scope for doing a corporate action to increase shareholder value is greater. 281p is still a good entry point. Other construction related stocks, especially those with US exposure that are in our universe also did well, such as Atkins (+3.4%), Wolseley (+5.7%). Some of the read across stocks such as Ashtead (+11.5%) and CRH (+6.0%) did well though the 4.3% rise at Keller was subdued and suggests that it may have further to improve despite recent difficulties.
The losers yesterday were the stocks with limited or no US exposure. Serco, down 1.7% was the largest loser, despite around 22-25% of revenue and operating profit arising in the Americas. At 136p at close last night Serco is trading comfortably within a 130p-140p band so the change yesterday was of little importance. Compass also saw a small fall, down 1.7% to 1398p which is also just the swings and roundabouts of trading on the day though, notably in its case, big broker support is less enthusiastic, on valuation grounds.
Grafton’s progress seems to us to be good in markets that were expected to be tough. The company provides no information on the volume/price mix contributing to the revenue changes revealed today. The implication from the text is that volumes are holding up in te main operations if not a tad higher but pricing is difficult. It may be that its rebate structure with manufactures is driving its strongly to generate sales volumes possibly at a faster pace than it might prefer. The dreaded words price deflation are not mentioned but on some items and/or in some categories that may be an issue. The company says little about next year but that is understandable given the uncertainty in its markets and tricky situation regarding FX impacts on imported materials. Overseas suppliers will want to use Grafton’s distribution in the UK of course so that is not an issue but UK consumer acceptance of price increases has yet to be fully tested. The £20m restructuring programme is proceeding to plan. The operations in Ireland and the Netherlands are key pluses for the company and are overlooked by investors, in our view. They comprise some 25% of revenue and a rising proportion of operating profit. With EPS this year of 42-44p (depending on FX) and 45p next year Grafton is very good value at 537p, in our view.
Bovis adds a little to the conundrum of the UK housebuilders and where they are in teh cycle and amid the increased level of uncertainty. Brexit seems to have had little to no impact on trading and government support seems unchanged and unwavering. But it should have done in theory and still may do so. The sector’s sluggish approach to replenishing landbanks and cash conservation suggests caution on the part of management. Admittedly land banks now are far larger than they were ten years ago and for once Redrow yesterday did not complain about the UK planning system being slow and lethargic! So the need to have a large number of plots to sustain sales rates is lower now. Our view is that the housebuilders are now fairly valued and might be cheap, even after yesterday’s c 3-4% rise in the sector. The Autumn Statement is unlikely to say anything harmful to the quoted companies in the sector; if anything is said about housing it is likely to be about increasing volumes from the registered providers. At 803p at close last night and with 110p of EPS expected this year Bovis, never one of the most popular housebuilders for investors, is trading at 7.3x prospective which is low by historic standards and fails to reflect the much improved balance sheet structure that now exists across most of the sector.
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.