Market Commentary - Housing, Infrastructure, Construction and Services - 17th November 2016
Kier has announced its update a day earlier than expected ahead of the AGM tomorrow. Norcros and Atkins have announced half year numbers, which were on the rota. Morgan Sindall has announced that it has a part to play in HS2 with the JV of which it a part being awarded the Central section enabling works worth £100m to MGNS.
Kier has announced its update a day earlier than expected ahead of the AGM tomorrow. Norcros and Atkins have announced half year numbers, which were on the rota. Morgan Sindall has announced that it has a part to play in HS2 with the JV of which it a part being awarded the Central section enabling works worth £100m to MGNS. Quick canter through today as its 8.30 on parade in Lincolns Inn for Atkins results and then a smart shift to Euston for the Forterra trip to Measham.
Kier has told us that trading is in line with expectations so far this year though again reminded us they will be 2H weighted. Looking through the statement there are no surprises. The recent increased emphasis on taking advantage of opportunities in property and residential is prominent in the release and is the notable feature making Kier a little different from rivals at present. Its greater exposure to the regions provides it with “insulation” from some Brexit impacts on London and teh South East. Average net debt will be about £300m this year reflecting that approach. The company is shifting its attention away from private development and recycling cash into mixed tenure and regeneration projects. Having said that the comapny reports today that in the private segment sales, visitor levels and reservation rates are above last year’s level. The company re-emphasises that it is still on track for 10% CAGR in earnings to 2020. It will fall short a little on that pace this year with EPS growth of around 5% to 112p; the stock closed at 1415p last night.
Trading news from Atkins has been familiar for several years and today is no exception. UK very good, US good and improving, Middle East OK but getting tougher and cash difficult to extract from customers, AsiaPac OK but could be better and Energy (ex nuclear) challenging. The slight variation this time around is that the US and UK are trading a liitle more strongly than expected and the Middle East comments are a tad more negative. Revenue was up 10% to £995m at the headline level and 4% at CER and underlying operating profit rose by 11% to £65m. The operating margin at 6.6% is slightly higher but still short of the target level. Net debt was £90m at the period end after two substantial acquisitions and we suspect cash balances will be rebuilt. We expect to see EPS of 115-120p this year (depending on FX) so the price at 1660p may not rise much and there is little in the news today to alter views.
Remuneration and Audit Committees in Support Services
The struggles in the last 15 years regarding Support Services companies accounts (Amey 2002 through to Mitie and Capita today, at least 20 companies guilty of the charges brought against them) arising from the ability to shift revenue and cost across years has never really been tackled by boards. Remuneration and Audit Committees often have overlapping membership. The average lifespan of a CEO (five years according to studies) is much shorter than that of a long term investor. The veracity of the accounts clearly begs questions about their ability to raise new equity. Serco was able to get funding as it had a new proven top team, a thorough cleansing of the numbers and a plan for progress and disposals. Others may not be as fortunate and some definitely were not, such as Connaught, Spice and Jarvis.
While we hear that in DD exercises and in Audits the accountancy profession is paying more thorough attention to its duty, the role of the Board Committees is hardly questioned by the owners. Perhaps within the larger investors and institutions there is an ambiguous relationship with corporates and across funds that prevents the natural activists, the main owners, from voicing concerns loudly. Activist funds came into vogue at one point (eg Hermes Lens Fund) but now so much now as the malcontents just get out of the stock or go short or both.
Whatever view readers may hold about Queen Theresa’s thoughts on corporate largesse generally, in this sector she may have a point. Remuneration is often linked to adjusted earnings, which can be kept going, at best, for a while with acquisitions and fair value adjustment and restructuring charges.? Perhaps NEDS should have assured tenure and a stipend. It is increasingly questionable whether they own shares in the companies in which they are involved.
By the way for those looking for the next faller/s the odds are against T Clarke and Bilby, both tiddlers but to be avoided. We also have concerns about substantial write-offs to come at Mitie, Interserve and Capita. The best time to have “crash” is when it’s expected, and in all three cases the share price is winking at us frequently enough to know that care should be taken by investors. In the case of IRV it is more than a wink. And there is still room to fall from the current levels at all three.
Investors may complain and be shocked by warnings. But with research, as with most things, you gets what you pays for. Independent research by knowledgeable outsiders and a more robust NED regime are the keys to the way forward, we believe. While the Rem Comm and Audit Comm get external advisers to guide them they are staffed by board members who appointed management and decided the strategy. More independence and independents may be needed. Especially in this sector if it is to retain attractiveness to the investment community.
Yesterday in the UK markets
Yesterday was not a great day for the HICS sector with just three stocks rising despite relative good news. Speedy Hire, a favourite of ours was up 15% to 42p with plenty to go. Polypipe rose 4.8% to get near 300p at 299p as some investors perhaps kicked themselves for not getting in earlier. Have few fears the current level is a good entry point on a three year view. Interserve was the biggest faller, down 7.4% to 294p as the risks overpowered any optimism. It takes a very robust approach to investment to be positive on Interserve given its top team hiatus, inability to guide accurately on its troubled projects and substantial and possibly increasing net indebtedness. The issue we see is that IRV could be on a downwards spiral in trading. It’s hard to see how a final dividend can be paid, on current form. A prolonged and well heralded departure of the leader of an organisation may work in some situations but at Interserve clear leadership is needed but instead there is a vacuum, difficult to fill for for the board, employees, customers and financial supporters. . Rule One of successful organisations was ignored, that is to be successful a legitimate and credible leader is needed.
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