Market Commentary - Housing, Infrastructure, Construction and Services 15th February 2017
We have to admit that by the standards of most school half terms this one is quieter than most. It may be the calm before the storm next week when the December year ends start to report their Prelims. The leader of the pack yesterday was Capita which rose 2.5% thereby recovering the previous day’s losses. Compass was the back marker falling 1.3% to 1427p which we believe as a single one day move is not that significant. What is of note of that it is struggling to gain traction at this level.
We have to admit that by the standards of most school half terms this one is quieter than most. It may be the calm before the storm next week when the December year ends start to report their Prelims. The news yesterday from the ONS that house prices rose 7.2% in the year to December compared with 6.1% in the 12 months to end November confirms what the housebuilders has said in updates and other data. The pressure arises from first time buyer’s demand and a shortage of stock, we are told. That is the purchasing segment least affected by the Stamp Duty changes that are having an impact on some other segments of the market, such as buy to let. The doom mongers on housing will point to the negative impact that rising inflation and possibly interest rates may have on the market. Inevitably there will be a Bust phase to the housing cycle but the evidence so far is that it is a long way off, as there is still a substantial shortage of property in the right areas and consumers are likely to look at elements of discretionary spend before sacrificing their accommodation budgets.
When the Bust comes the housebuilders are far better insulated for any dip in activity in the housing market than they were in 2006-2009. But the ways of achieving that gives rise to two issues that may come to the fore in the next few years. Firstly, to varying levels with each company and, with deals that are not in the public domain, much of the land owned and controlled by the housebuilders (whether strategic or short term) is contracted on contingent, deferred terms. The insulation this provides to balance sheets is substantial. The lack of transparency in these deals may start to concern investors. By their nature these deals are not unlike an acquisition with an earn out, the liability for which must now be reported.
Secondly, the increase in the amount of strategic land has brought the housebuilders more prominently into the sometimes shadowy world of changing the use designation of land. For quoted entities this has implications, especially at present when throughout the UK there is a large number of local consultations about switching land from Green belt to building land. Much of the day to day work is done by consultants such as Arup, who are massively conflicted as advisers to Councils, Housebuilders and Developers. Their work on behalf of the land developers, who more frequently today may not be the Land Registry recorded owner but the unreported option holder, is a story that will soon unfold. The change is that the money behind the applications and reports might be from a quoted entity. Mmmmm, there may be growing demands from the investors and the public on these issues.
The leader of the pack yesterday was Capita which rose 2.5% thereby recovering the previous day’s losses. The new Chairman has a great deal to do at the company and is taking his time. Hence there are few reasons for investors to get too enthusiastic. The share price has reached the 530p level (526p at COP last might) in recent months only to retrace and there are few strong arguments for that to change until there is greater clarity about strategy, funding and possibly management. Capita has made a decision to sell some activities now deemed non-core, though it looks more as though it’s a forced sale of activities to boost the balance sheet cash, in the short term, of operations that are thought to be less core than others. A purchase of the stock at this stage is high risk but, there are enough good thing at the company to believe that credible and coherent group will emerge, it’s just unclear what the earnings might be and what the balance sheet might look like.
Compass was the back marker falling 1.3%to 1427p which we believe as a single one day move is not that significant. What is of note of that it is struggling to gain traction at this level. It has traded in range 1300p to 1500p since June 2016. That is a wide range of course and the period includes a substantial alteration in FX rates. The easy wins have been gained already and while the company pointed towards what it called exciting and substantial opportunities for growth in its last update it may be that investors are sceptical and realistic about just how high margins can go, as 7.2% seems to be the cap. If future earnings growth is to arise from revenue increases best the company reveals a bit more about how that will happen if it wants the stock to take the next step upwards.
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