Market Commentary - Housing, Infrastructure, Construction and Services 11th October 2016
More news than expected this morning. SIG has got a new FD, Doug Robertson will retire at age 63 to be replaced by the current incumbent at McCarthy and Stone Nick Maddock. On the face of it this is not a natural move in our view. Entu has issued yet another profit warning for the year ending 31st October as, despite improvements in parts of the business following management action, the performance in the Installation operations of the Home Improvement Division is less than good.Mitie was the best performer yesterday with a 2.4% rise to 199p. We have talked enough about this stock and sustain a view that on a 12-18 month basis it should perform well but there may be a lower entry point as the accounts are adjusted away from “Old” Serco standard
More news than expected this morning. SIG has got a new FD, Doug Robertson will retire at age 63 to be replaced by the current incumbent at McCarthy and Stone Nick Maddock. The retirement of Doug is understandable but less so is the switch to SIG from McStone (market cap £875m) to SIG (market cap £658m) and when the potted CV indicates no previous experience in Distribution. Arguably sector experience is of no consequence as FDs can be “hired guns” but that role in a house builder is usually one of the best rewarded jobs in the UK and Nick was at McStone for over five years. On the face of it this is not a natural move in our view
Grainger has announced that it is trading at the top end of expectations and the performance has been resilient, despite stamp duty changes and the EU Referendum; we shall be taking a particular interest in the Private Rented Sector (PRS) in the coming months and Grainger is the leader in that area at present.
Entu has issued yet another profit warning for the year ending 31st October as, despite improvements in parts of the business following management action, the performance in the Installation operations of the Home Improvement Division is less than good. It says it expects to pay a dividend of 1.5p out of its increased borrowings which is questionable unless the improvement in group earnings is solid but the data suggests it is not. Could Entu be one of a number of Home Improvement product and services companies that struggle in the quoted arena and slot back into private hands? Frequently they are not bad companies but the nature of the operations is such that withstanding shocks is very tough and the competition often has a lighter overhead structure and/or can run for cash for a few years and may have different governance issues. (eg Heywood Williams, Ultraframe, Eaga)
Mitie was the best performer yesterday with a 2.4% rise to 199p. We have talked enough about this stock and sustain a view that on a 12-18 month basis it should perform well but there may be a lower entry point as the accounts are adjusted away from “Old” Serco standards; there is no sign of customers deserting the company which is a very good sign. Travis Perkins was the back marker d own 2.6% to 1428p and is showing signs that it will drift out of the FTSE100 in early December. Institutions are lining up for a greater fall in demand in UK construction and RMI next year than the companies in the area, SIG and Grafton also fell by over 1% yesterday. The 23rd November Autumn statement may provide some counter balance but the market view is that Hard Brexit is bad for exposure for house building and improvement spend even if it is not fully shown in the data. Other than a strong Autumn statement it’s hard to see a catalyst for a change of view on the Merchants at present even if on current valuations they are cheap.
SIG has been in difficulties for some years. The catalogue of issues including weak demand, lack of integration of acquisitions, dependence of around 60% of sales on just five suppliers and a lack of obvious area for growth has been unwelcome for shareholders. The company used exceptionals for several years to get adjusted profit to the “right” level and continues to do that though on a smaller scale. The new FD has a hard task ahead thoough in fairness progress has been made with the strategic initiatives announced over three years ago and the business shows signs of having stabilised. New ventures, such as Air handling and insulated roof and wall panels appear to be promising and may make a difference though the latter (Insulshell) may suffer from increased capacity elsewhere that has a greater level of investment. At 112p and with EPS of 11.5p expected this year (possibly higher due to FX tailwinds but that may be offset a little by higher imported material costs) the shares are trading on less than 10x p/e which is very cheap for a Merchant. So either the price is wrong or the earnings are; the market is saying that perhaps the risk to earnings is down in our view.
Grainger is an interesting case as the amount of shareholder dissatisfaction has been high despite the companies actions to improve showing signs of success. It closed at 219p last night. The stock has traded in a 200p to 240p band since late 2013 despite the strategy developments and much greater focus on UK PRS. We are told today that the company expects to deliver a 24% cost saving in 2017 which we assume is good but it’s not stated what that means, what is the number against which the 24% should be measured or how much might drop through to earnings, in management’s view. We do not cover the stock closely so perhaps those who do will know as the saving sounds large it’s worth exploring. And should make a substantial difference to the 5.1p of EPS expected this year; though the market has 7.6p pencilled for next year so much of the saving might already be in the price. The company points to a revaluation taking the NNAV up slightly which should aid valuations. We believe that Grainger is in the right place at the right time and the focussed strategy is likely to be very successful.
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.