Market Commentary - Housing, Infrastructure, Construction and Services - 16th November 2016
Trading updates this morning from Forterra and Barratt Developments as well as half year results from Speedy provide us with good guides to investment decisions.Forterra has announced that it is trading in line, sales volumes are higher than last year and the supply chain issues are working through as expected. Civitas has raised £350m as the first quoted Social Housing REIT. The social housing sector in the UK is disaggregated and little know
Trading updates this morning from Forterra and Barratt Developments as well as half year results from Speedy provide us with good guides to investment decisions. All three releases are positive about past performance and future prospects though there is a hint of caution in each, for obvious reasons but not enough to concern investors, in our view.
Forterra has announced that it is trading in line, sales volumes are higher than last year and the supply chain issues are working through as expected. The company has a site visit tomorrow which we shall attend. Net debt/EBITDA is now at 1.7x compared with 2.2x atthe time of the float and capex of £6.5m has been authorised at Desford and Claughton which will reduce production costs and provide a small increase in capacity. Barratt has updated ahead of its AGM later today and adds little new information on the market from previous news this week and confirms that it is in very good shape. Forward sales are up 4% on last year, sales rate is high at 0.74 (0.71 last year) and regiobnal markets are performing well. The only concern is in London where pricing is said to be challenging. It remains to be seen whether Brexit will cause demand to dip if jobs go elsewhere in scale; there is no doubt London is already losing financial sector jobs but the the rate of attrition is small. Speedy’s recovery seems to be on track as at the half year it reported revenue up by 13% to £187m and EBITDA up 19% at £30.4m; net debt was down 17% at £85m. There was even room for the company to raise the interim dividend by 10%. And the company has flagged that teh full year out-turn will be ahead of current expectations. More below.
Civitas has raised £350m as the first quoted Social Housing REIT. The social housing sector in the UK is disaggregated and little know. There are 1,500 Registered Providers of Social Housing in the UK compare with around 20 in Germany. Many have EBITDA margins of 40%+ depending on location and the rate of disposals. This float is interesting given its tax advantage and its focus on the Social sector. It starts also to put into question the tax status of the Social Housing organisations which are classed as charities and we may see some come to the market, perhaps. The progressive 5% yield at Civitas will prove attractive especially as the covenant is strong
The main talking point is of course Interserve and what the top team has been thinking to get the Glasgow job so wrong. The client in Glasgow has served a termination notice and the financial implications for Interserve are not yet known. Interserve shares fell by 14.1% yesterday as the impact of its 13.000 announcement. The issues were said in previous releases to relate to the design, procurement and installation of the gasification plant. The charge sheet, unfortunately, is not small. And the £154m job in Glasgow is just one of six with a whole life value of £430m. Interserve has said it has exited waste to energy projects but clearly the cost of doing so is not yet known and may take a while to establish. The shares closed last night at 317p and it hard to see where the bottom might be at present. Should there be a long litigation process regarding the Glagow and otehr similar projects the shares could be under a cloud for some time and the company may be underfunded, thereby restriction its capacity to win new work.
The recent spate of CEO exits and warnings makes obvious the challenges of operating in the sector at present, especially plain vanilla FM. Market conditions we are told by all participants in the services sector are highly competitive; construction less so as the number of viable companies capable of delivering large scale work is small. The nature of competition is not just about price but also the more demanding nature of customers. This is exemplified in the NAO report published yesterday on Delivering the Defence Estate. The report is long but worth attention. It is quite critical of the providers to the defence estate, especially Capita in its new role at the DIO. We shall report on this tomorrow. The performance of the MoD on its estate performance is a frequent topic of attention for the NAO and it is never happy. The issues may not just be with the suppliers and in fairness the report is critical of the MoD civil servants and military. Most of the report is written looking through he rear view mirror and makes recommendations taht amount to not much more than “could do better” in most operational areas.
Polypipe was the best performer yesterday, rising 9.3% by close of play as its update ws well received. It was always difficult to understand why it had been under such pressure. Talk of issues in Plumbing and heating markets from the Merchants will not have helped but to be negative on that basis is to misunderstand fundamentally Polypipe’s operations. The price at COP last night was 284p, 12x prospective earnings for this year but on 2017 EPS of 27p it probably looks undervalued to many observers.
Forterra’s share price rose above the float level of 180p yesterday as the market anticipated the good news released today. The important issues for investors is that teh company is trading in a relatively stable market in which volumes of new house building seem to be sustainable and it is investing in the future. The improved balance sheet is significant as it will allow room to grow the business and improve productivity through capital investment. The announcement by Persimmon that it will make 80m concrete bricks is not likely to distract Forterra, the second largest maker of proper kiln fired bricks with a 30% market share. Just to remind readers the UK uses around 2bn bricks a year. With 22p of EPS expected this year and with cost improvement perhaps 23p next year the price at 180p looks harsh.
Speedy’s recovery was clearly unhindered by the hiatus of the EGM and call for changes on the board. The simple formulas of increased focus on hiring only what makes money and doing it more often seems to be successful. The improvement in net debt is important as it allows the company the freedom to be more selective and re-invest in higher added value equipment. The statement this morning is strong on the commitment to improving customer service and improving performance in the medium term. But given that earnings expectations have also been raised on a six month view it seems to have all bases covered. Historically the hirers have traded on EV/EBITDA of around 5-6x so at close last night the EV was £280m. With £65m+ of EBITDA expected this year the valuation is 4.3x, suggesting considerable share price upside
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