Market Commentary - Housing, Infrastructure, Construction and Services 14th October 2016
Inland Homes has reported its full year numbers to end June 2016 today. The read across from Inland is positive for the housebuilders but the company acknowledges it is still early days on the road to Brexit. We spent a fair amount of time in the last two days at an Offsite Construction event in London. The biggest visible change is likely to come in housebuilding, in our view, where the challenge of using trades on site is increasing, the need for faster build time and greater certainty is rising and because offsite manufacture is becoming cost competitive with other methods
Inland Homes has reported its full year numbers to end June 2016 today. The company indicates that it has not really been affected by Brexit. It headlines on the increase in NAV of 30% since last year to 91.5 a share, which compares with a share price of 63p last night. The focus on NAV is perhaps to detract from the 11% decline in revenue to £101.9m, which is due partly to a large sale in the prior year and the deferral of the sale of 23 completions to this year. Results are always likely to be lumpy at Inland due to the size of some projects relative to the size of the company and because it sells strategic land as well as new build and rental, the mix does not lend itself to smooth earnings progression yet. The company has 6,681 plots in the landbank and a further potential for another 1,600 units in its 330 acre strategic landbank. Net debt at £38m is high for a company with a market capitalisation of £128m but we doubt that is an onerous burden in the current climate. The major housebuilders are not as active as they were in the land market in the South East but the second tier is, we believe. The read across from Inland is positive for the housebuilders but the company acknowledges it is still early days on the road to Brexit.
We spent a fair amount of time in the last two days at an Offsite Construction event in London. There is an increasing amount of interest in offsite triggered by large scale investment (£50m+) being made by Laing O’Rourke and by L&G along with government statements of support for Modern Methods of Construction (MMC). Estimates from an industry body indicate that the industry loses 50,000 workers a year from a current number of around 3m placing further strain on build costs and time. The Egan report of 18 years ago (Rethinking Construction) that called for more industrial methodologies to be used in Construction, to improve among other things Health and Safety and waste, is slowly having an impact and in some segments may be at a point of inflection for economic reasons.
The biggest visible change is likely to come in housebuilding, in our view, where the challenge of using trades on site is increasing, the need for faster build time and greater certainty is rising and because offsite manufacture is becoming cost competitive with other methods. Operators in the offsite industry I met in recent days would tell me everything is getting better of course but there are genuine reasons to believe that offsite could see a dramatic increase in the next few years, if Local Authorities enter the direct build arena in greater quantities and PRS build rises as expected. In the privately owned segment the mortgagability of the product may need to be proven a little more and the housebuilders will need to alter their working methods. There is much more to write on the issue but not in a morning note. There are few places in which UK investors can make an equity investment in Offsite at present. So the main opportunity, from an Institutional perspective at present, is direct investment as L&G has done. More on this topic another day.
G4S topped the table yesterday rising 2.1% to 236p after favourable big broker comment. Nothing has changed at G4S except the larger houses are waking up to the company’s strengths and in fairness the company is being more positive in its own guidance. The disposals are moving along but nothing has been announced yet. There is no urgent need to sell at the wrong price but clearly the uncertainties are greater now than they were when the disposal decision was made. EPS this year will get a tailwind from FX but with 15.5-16p expected the closing price last night is not a stretching valuation, in our view.
Mitie was the backmarker yesterday falling 3.3% to 199.5p. Any new CEO going into Mitie will want some changes and will some financial adjustments that may hit the P&L though they could have a limited impact on cash. A quick overview calculation indicates that the business is capable of £2-2.2bn of revenue given current contracts and 5% margins. With £15m interest cost and 20% tax the business (assuming no new equity) is capable of around 20p of EPS. So 200p seems the right level for now we expect. Peers are on slightly higher levels but with 8.9% of the stock shorted (source Castellain) there are clearly some who view the expected write offs to be substantial and perhaps that trading is not as strong as we indicate. We would expect some recent wins are still to be announced and there is no sense in which customers are moving away from Mitie so our thought has to be that the £2bn revenue can be sustained.
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