Market Commentary - Housing, Infrastructure, Construction and Services 11th April 2017
There is limited new news this week and only Victoria plc, the carpet maker and distributor, adds to our knowledge this morning with a positive trading update. The topics raised most frequently with us are around the UK central government being so tied up with Brexit it is tempted to extend existing outsourcing services contracts and whether Greg Fitzgerald can turn around Bovis.
There is limited new news this week and only Victoria plc, the carpet maker and distributor, adds to our knowledge this morning with a positive trading update. It says it will deliver results “comfortably” ahead of current expectations for the year ended 1st April. The company makes no comment on market conditions in the UK; we have assumed they remain helpful to the company given its usual very bullish statements about the past and the future. The statement points mainly to the management’s own efforts to implement its buy and build strategy in the UK, Australia and more recently in Europe rather than market factors.
There were just a few risers in the sector yesterday despite the FTSE 250 rising 0.2%. Homeserve had the best showing, rising 1.5% to 652p. With market forecasts of 25p of EPS in the year just ended and 29.5p for this year the stock is trading on 22x propective p/e which is high for the sector. The largest loser was SIG, down 1.9% to 113.7p, up 10% YTD so the move yesterday we regard as a blip. These moves were in a narrow range which is quite typical of a pre-holiday period with low volumes and no clear sense of direction in the macro environment.
The topics raised most frequently with us are around the UK central government being so tied up with Brexit it is tempted to extend existing outsourcing services contracts and whether Greg Fitzgerald can turn around Bovis. On the first issue our sense is that contracts will be extended which is usually good for services company margins as by the later periods of contracts the working processes are well understood and clearly there are no associated bid costs. This could be good news for Capita despite some clouds over recent contracts such as the DIO management project; clearly the roll-over of the Compass contracts in which G4S and Serco are involved was not ideal but the terms were improved in the two year extension. The further issue is whether Brexit preoccupation will divert away from major Infrastructure decisions and we fear it might. The notion that Infrastructure investment will be made to counter any Brexit inspired dip in activity is commendable but, as always in this area, it takes time to turn political rhetoric into actions. There are few signs of change in that regard, as yet.
On the latter issue, Bovis, it’s probably fair to say that if Greg cannot do it then nobody can! Indeed Bovis might be a less complicated project for him than Galliford Try as there is no Construction arm to distract attention from the main tasks of rebuilding confidence and improving operational performance. The Gross Development Value (GDV) of the landbank at end 2016 was around £5.1bn and the invested value is £1bn; that 20% land cost to ASP is higher than some rivals where 15-17% is the norm so there is an effort needed to get back to industry norm margins not just through better build quality but also through re-planning sites. The business tripped over itself by trying to grow too fast and we suspect that it will take a step back and may need to eliminate some overhead so that operating margins can get back to over 20% by 2018 at the latest, 16% in 2016 and kick on from there. The task for Greg is large because morale will be low but the process includes nothing he has not seen before and the base business is sound and the balance sheet is strong with net cash of £39m at the year end. The brand might be damaged a little but location trumps brand in housing, every time. Closing at 887p last night and with EPS last year of 90p the stock is not cheap but getting industry average margins of 21-23% gets EPS to nearer 120p and that makes the current price look cheap.
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.