Market Commentary - Housing, Infrastructure, Construction and Services 17th October 2016
Interserve has announced a £38m/three year FM contract with Land Securities at eight of its shopping centres. Babcock is holding an Away Day for city folk at Bovington camp which we are not attending. The only planned news in the rest of this week is on Wednesday when Rentokil and Travis Perkins update on progress YTD and Interserve is holding a gathering to explain the new plan for its equipment hire operation, Kwikform.
Interserve has announced a £38m/three year FM contract with Land Securities at eight of its shopping centres. Babcock is holding an Away Day for city folk at Bovington camp which we are not attending; no new data is expected but lots of play with military vehicles is likely! Biffa starts trading this morning at the lower end of the expected range at 180p, which given the financial structure (net debt/EBITDA c 2x) and some uncertainties around the business and the HMRC dispute should not be a surprise or a particular cause for concern. Biffa’s ownership has been uncertain for some years so to resolve it in this way is positive for the business and as an aid to guide the valuation of other companies in the sector. The other piece of interesting news this morning is the sale by SSE of 16.7% of Scotia Gas Networks of which it owns 50%, the other 50% is split equally between Borealis and Ontario Teachers pension fund. SSE bought its 50% in 2005 for £505m and is now getting £621m, backdated to 1st April 2016 for a short 17%. More below.
The only planned news in the rest of this week is on Wednesday when Rentokil and Travis Perkins update on progress YTD and Interserve is holding a gathering to explain the new plan for its equipment hire operation, Kwikform.
Many HICS stocks are bouncing around with a limited sense of direction. In the Services segment the index is at or near a 10 year high, just 3% below its 10 year peak reached in May this year. Much of the climb is due to the companies with overseas exposure as clearly some UK only ones have declined sharply (Capita, Mitie). The Housebuilders are 4% below the 10 year peak in also reached in May 2016.
The one area where there is some direction is Construction and Materials (C&M), the index is just 6% below it ten year peak reached in May 2007. C&M has had a long haul back but the recent shift has been stunning and the sector is up 43% since February 2016, having had a pause for breath at the time of the Referendum. Clearly in Market Cap terms CRH dominates it but Balfour Beatty and Kier have been strong recently. (Carillion and Interserve are in the Services index). Our sense is that the C&M move has run its course for now.
Friday last saw Serco lead the pack, rising 4.5% to 136p. It has traded in a range between 125p and 135p since August. Odey has announced it now owns over 5%. In valuation terms the stock is probably overvalued as EPS this year will be around 4.5p and probably a tad lower next year, based on current guidance. The level of confidence in out-performance is rising and with EPS of c 7-8p in 2018 and maybe a resumption of dividends now is the time for an Institution to build a stake. The Serco proposition to its customers, that it shall be the public sector’s trusted ally in service provision, is in our view likely to succeed and results in a £3-3.5bn annual revenue business with 5-6% margins and moderate growth.
The losers on Friday were down less than 1% into which we see few indications of future moves. Polypipe was the main loser, down just 0.9% to 265p. It is getting limited support and ratcheting down a bit. We expect there is little wrong with the business but the company was cautious in its statements about prospects in the recent results meeting. We have mentioned previously its position near the bottom end of the FTSE250 and the possibility of demotion which can become self fulfilling. The Autumn statement and a trading update, which in past years has been in mid/late November should provide some support; though short term there may be read across for Travis Perkins on Wednesday.
The sale of part of SGN is interesting as it has implications for the valuation of other infrastructure assets. The buyer is the Abu Dhabi investment Authority. SGN distributes gas to 5.9m households in Scotland and Southern England. The financial structure of the business is typical of a Utility as it had £5bn of assets, £1.1bn of revenue and just over £600m of operating cashflow in its last full year. Of the cash flow over £300m is used to renew and replace the network and £160m was used to pay a dividend to shareholders. The implication therefore from these numbers is that the buyer has bought an historic yield of 4.3%, its share of the dividend payment. Of course the calculation may be a little more subtle but the rough maths do not alter substantially. And of course 16.7% hardly provides much control so it is more an investment than a strategic move. The implications for the value of Infrastructure assets from this deal appear to be very positive. Good news for the Infras Cos and trading companies in the space such as Balfours, Carillion, Interserve and Fulcrum.
Last Weeks Moves.
The data suggests that there is little to report. Normally we can highlight moves one way or another that have implications for the future. But last week the Brexit induced uncertainty and relative lack of news has put the HICS segment into the Doldrums. The next big piece of sector news will be the 23rd November Autumn Statement but of course in the run up to that we shall see lots of kite flying on new policies. YTD the market is up around 11%. The HICS segments have shown widely different performance using the FTSE indices with Services up 4%, Housebuilders down 0.5% and the Construction and Materials segment up 22%. But to gain with C&M investors would need to have owned CRH which is up 35% YTD as other stocks were generally stable. We suspect the segment will not reverse its underperformance in the rest of the year but will not get worse, except perhaps among the housebuilders if an interest rate rise is mooted as inflation rises towards the year end.
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