Market Commentary - Housing, Infrastructure, Construction and Services - 14th November 2016
Interserve has announced a £40m new contract with several government offices worth £40m over five years and Taylor Wimpey and Kingspan have updated the markets. Taylor Wimpey has announced a positive update saying things as it sees them. The news from the markets is that progress is volatile in the HICS areas, as expected by us. Profit warnings at one every few weeks are not helping of course when combined with swings in sentiment triggered by political changes
Interserve has announced a £40m new contract with several government offices worth £40m over five years and Taylor Wimpey and Kingspan have updated the markets. The Interserve contract is the first we have seen under the new Crown Commmercial Services procurement process for better buying of FM; IRV is well placed to win this as parts of its organisation have provided FM to government offices in London since 1993 when the Property Services Agency was privatised.
Taylor Wimpey has announced a positive update saying things as it sees them. The story is familiar insofar as the company says that trading is good, ahead of last year but they are cautious and as with the peer group they have choked back on land sales with just 11,500 added YTD. That is below the likely level of output for this year of up to 14,000 units (the company does not say how much of the land bought was open market and how much was transfer from the strategic bank). The main point we highlight is that build costs are expected to rise by 3-4% this year and next with labour costs pressures being the main push factor.
Kingspan’s update describes a very positive rate of progress with sales up 17% at CER and 13% headline in the first nine months of 2016 to end September. The statement is rich in data, which we address below but the headline to remember is that trading profit will be up over 30% at €335m if current FX rates prevail. The only word of caution that might affect views is that the rate of progress slowed in Q3 with the 17% growth rate in revenue at CER YTD slowing to 10% in Q3. More below.
In terms of treat of this week McCarthy and Stone provides its finals tomorrow and Polypipe, Lavendon and Crest Nicholson are due to update the market; Amec also provides an update. On Wednesday Speedy Hire releases its interims to end September and Barratt Developments is likely to update us for its AGM. On Thursday WS Atkins releases it interims, Norcros will issue an update and Forterra is holding a CMD at one of its brick plants. And after a buy week we ease into the weekend with on Friday Kier’s AGM update and read across from Electrocomponents interims. The week will also have an overlay of leaks and rumours regarding the Autumn Statement due on 23rd November.
The news from the markets is that progress is volatile in the HICS areas, as expected by us. Profit warnings at one every few weeks are not helping of course when combined with swings in sentiment triggered by political changes. Friday SIG’s warning sent it to teh bottom of the class with a loud bump. The warning indicated that PBT could be up to 17% lower than previous guidance this year triggering a 22% fall in teh share price. Recent warnings have caused a 2% fall for every 1% reduction in PBT indications but SIG escaped that “rule” as the price was already impaired, short and long term. The conference call did not shed much greater light save it demonstrated a lack of any real preparation as every question seemed to be a surprise. The likelihood of a great new CEO for SIG being available immediately is low and the interim’s recent track record at Amey is not stellar. SIG is therefore in limbo as the new FD has yet to arrive, the CEO will not want to alter much and the Chairman should have seen the signs long ago as they were clear and waited too long to act. Having said all of that at 90p, an EV of roughly 30p for every 100p of sales SIG culd be said to be cheap and a turnaround is a tough but do-able task from here.
The upwards moves on Friday were small and not meaningful. Mears was the best riser, up 0.9% to 451p on just 31,447 shares traded; it retained it good performance and seems to be solidly in a 440-460p trading band. Grafton continued it good progress from the reassuring update and despite SIG’s news rising 0.8% to 567p. Both companies are well managed by experienced top teams.
The contract win for Interserve is good news albeit it adds just under £10m a year to revenue. It is however symbolically important for the management as many of the current top team came to Interserve from the Building and Property (B&P) acquisition made in 2003 which gave the company its first real FM capability. B&P was a spin off from the Property Services Agency, which attended to Central London government properties and its CEO at the time of the deal was Adrian Ringrose. IRV has promised a mid November update but we are not aware of a confirmed date as yet. The stock has bounced back from recent lows, closing Friday last at 358p but is still greatly undervalued compared with peers if the guidance on earnings and net debt is valid.
Taylor Wimpey’s update is a classic “cautiously optimistic” statement. The historic numbers and current trading are good but as with most housebuilders there seems to be something going on that indicates caution as the best policy. It may partly be cyclical but with news f today that £65bn of investment in the UK has been put on hold there is more smart money being put on a lagged impact from Brexit. Wimpey’s numbers are helpful as they show still good performance but some figures are going very slightly the wrong way, if they are statistically valid changes. Sales rate is at 0.75 YTD versus 0.76 in 2015, cancellation rates are historically low at 13% but higher than 11% last year. Those numbers are, however overshadowed a bit by the forward sold position being 5% higher now than last year at 8,981 units. We find few counter arguments to TW’s view that the long term position for UK housebuilders is sound and the company is backing its view with cash, confirming £450m of dividend s this year to shareholders. It’s just those nagging doubts about the market possibly having to adjust to higher interest rates, lower levels of employment and uncertainty about government’s specific intentions for the sector and Brexit that are creating doubts.
Kingspan’s development has been a phenomenon for others to copy. Its core insulated panel product. It dominates its main markets in insulated panels and boards and has stuck by its long term goals through recessions and peaks. The company provides us today with a quick trot through the headlines for each product and in each country which provides few surprises. The only area that may be said to be a surprise is that insulated panel sales have been sluggish in N America in recent months and that is not expected to alter; the company provides no reasons for that outcome and expectation. Sales of access flooring in the USA (one of the few areas in which Kingspan has struggled for some time) are said to be particularly weak but offset by good UK office activity (which is consistent with teh news from Fit-Out companies). As read across Kings[and emphasises much of what we are hearing elsewhere but the Q3 dip in growth from very good to just good might cause a few questions to be asked today and not just about Kingspan.
Moves Last Week
The sector shifts last week were unusual as Housing and Services were flat against a market that rose 0.6% in the period. But the Construction and Building Materials segment rose by 7.6% , 26% up YTD, boosted by the Trump victory and the promises of substantial Infrastructure spend.
As might be expected Atkins and Balfour Beatty were the main gainers rising 14.7% and 12.1% respectively with Wolseley not far behind, up 8.6%. These stocks reached new recent highs on the back of the Donald. We suspect that they are sustainable longer term but short term share price s may retrace a little as buying enthusiasm wanes a bit, as it can after surges such as we have seen. Atkins reports later this week and we expect the update to be very solid and any trading surprise will be on the upside, probably from N America and that issues of Middle east cash collection will not have diminished.
Also note that Grafton rose by 8.5% following its reassuring update and Galliford Try ended the week 4.0% by saying nothing formally to the market as a whole at its AGM. Both stocks remain undervalued in our view.
SIG’s 18.6% decline on the week was the main downwards move of course. The vacuum at main board level has come at bad time for the business as getting in the last sales prior to year end is crucial for getting to expected rebate levels. It is also a time when trading terms for next year are discussed and internal budgets are set. The management hiatus could not be a a worse time, in our view. Rivals may see this as an opportunity in many ways but short term it may be that the competition can secure its own rebates and better by eating SIG’s lunch. The prospect therefore short term for SIG are poor as it is heavily exposed to some very strong operators in a competitive market. Stay clear unless you believe corporate action is imminent and that is not investing its just a bet!
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