Market Commentary - Housing, Infrastructure, Construction and Services 17th February 2017
Kingspan is the main news creator today with its full year results to end December 2016. Kingspan is probably the largest sector company of which many investors have never heard. The moves yesterday showed the HICS sector to have no clear direction at present.
Kingspan is the main news creator today with its full year results to end December 2016. Its 16% growth in revenue at CER is overshadowed by the 41% rise in trading profit on the same FX basis (CER). The headline numbers at Actual Exchange Rates (AER) show revenue up 12% to €3.1bn and trading profit up 33% to €341m. The headline earnings numbers are tad behind the consensus (c 1% lower) but that provides no reliable evidence as FX played a lot of tricks with external forecasts and company reporting in 2H last year. The company is very positive about its UK and European markets and talks of a clear recovery evident in Euroland. It is less positive about the US, especially in 2H and in the access floor operations across the pond; the company did, however grow its revenue in the area in 2016. The total capital investment in the year of €364m (€113m new equipment and €251m on acquisitions) tells us that the company is backing its views on the markets and its products. This is the first large sector company to report 2016 and the out-turn is positive. More below
The moves yesterday showed the HICS sector to have no clear direction at present. The Housebuilders and the Merchants have been gaining traction but the moves elsewhere are largely drifty and valuation ratings are lower than they were a year ago. Capita was the best riser, up 1.9% to 516p as it trades within a tight band of 500p to 540p; we have mentioned several times the need for clarity in several key areas. SIG was the largest loser giving back the previous days gain, with near 2m shares traded it fell 4.2% to 108p; the shares are up 4% YTD though, as with Capita, there are outstanding questions in its case a vacancy for a permanent CEO and somebody with direct sector experience in distribution is needed.
Kingspan is probably the largest sector company of which many investors have never heard. We visited it several times in the past and have watched it grow for over 20 years from a mainly UK and Ireland operation into a widespread international business with operations in places such as America, Australia, UAE, Finland and Mexico. Its core product, accounting for near 70% of sales, remains insulated panels. The demand for panels is expected to increase considerably and the company’s track record in innovation (product and production) means it will tend to be the dominant player in each national market. Panel sales rose by 17% last year of which 5% was due to organic growth; the UK appears to have a particularly good year and trading profit rose 38%. The insulation boards business grew revenue by 4% and trading profit by 28% though progress was held back in the Americas by capacity constraints. The US is the focus of substantial investment in boards, by the company, at present. The problem business for the company remains Access Floors; sales grew by 5% last year and trading profit by 8% (operating margin was up 40bps to 12.5%). For many companies that performance would be satisfactory but clearly alongside the numbers for other segments it’s a weak effort. The company has stuck by its operations in this area and they are making a return; its has been rocky path and will remain so.
The company is very well positioned for future growth due to its efficient production, good market positions and strong financial backing. It has always been run in a very tidy fashion. ROCE was 17% last year. Net debt/EBITDA is 1.1x which is much less than the 3.5x in the covenants; the company had €428 of net debt at end 2016. The outlook in terms of demand seems positive with the order book said to be solidly ahead of last year (no numbers provided that we can find) though the company is somewhat cautious about cost increase which it expects to pass on to customers. EPS last year reached 143.8 cents and 152 cents are expected this year. We suspect the forecast risks are on the upside but FX will have a considerable influence should we see more volatility. The shares closed last night at €29.7 and are up 15% already this year in € terms. The p/e multiple may be high but the growth justifies the high rating, in our view.
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.