Market Commentary - Housing, Infrastructure, Construction and Services 16th June 2017
There is no directly relevant news this morning. Here is a lot of comment in the press on the prospect of a rate rise and it’s not the role of this note to predict interest rates or the political and economic issues behind rate setting. What is 100% clear is that 3%+ inflation and base rates at 0.25% is not a sustainable norm in any economy.
There is no directly relevant news this morning. The key driver of the sector in the coming months will be macro issues, in our view. Uncertainty will be the most frequently used word in trading releases from UK biased companies in coming months. The voting split in the MPC interest rate decision yesterday is clearly not good for the sector, especially the housebuilders. There is a lot of comment in the press on the prospect of a rate rise and it’s not the role of this note to predict interest rates or the political and economic issues behind rate setting. What is 100% clear is that 3%+ inflation and base rates at 0.25% is not a sustainable norm in any economy.
The moves yesterday were nearly all downwards, only Mitie was in positive territory, up 0.6% to 285.5p. The main losers were the merchants with Travis Perkins down 4.8% to 1511p and Grafton down 3.7% to 734p. SIG also fell, down 3.4% after a strong recent run and despite around half of its operations being in Euroland. The operational gearing in that sub-sector always makes the shares react swiftly to the possibility that demand might be vulnerable. Travis Perkins has 113p of EPS expected this year so arguably the shares at 13.4x p/e are fairly priced, especially if 2018 growth looks to be under greater doubt now than it was a few days ago. The market forecast for 2018 EPS is 118p. The new housebuilders see no lack of demand but new build techniques and changing patterns of materials distribution are developing. Travis Perkins has been fully aware of these issues but that does not mean it can always adapt its business model swiftly or cheaply. In the retail area, Wickes, faces the challenges of B&Q and Homebase, where the new owners, Bunnings, are making improvements that might increase the competitive environment. So it is getting tougher generally for the Merchants and the TPK strategy of exploiting its strong market position is facing some tough hurdles at present.
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