Market Commentary - Housing, Infrastructure, Construction and Services - 18th November 2016
Grafton has no Euroland fears, indeed it sees opportunity and has agreed to buy a 14 branch tool, fixings and ironmongery business based around Amsterdam. Lafarge Holcim this morning and CRH yesterday announced good trading conditions and while revenue development was not stellar overall YTD (down 1.8% L4L at Lafarge Holcim and up 5% at CRH) earnings growth was very good.Talking of which we attended the Forterra Brick Fest and factory tour yesterday in Measham
Grafton has no Euroland fears, indeed it sees opportunity and has agreed to buy a 14 branch tool, fixings and ironmongery business based around Amsterdam. The consideration is not stated and the only number we have to work on is that Gunters en Meuser (G&M) had reported revenue of €33.4m in 2015. Analysts might get some stick for being overly focussed on numbers but there is a case for a bit more data on this deal. G&M is the result of the merger of four operations all of which saw trading difficulties in the Netherlands and combined in 2014. The original G&M business traces its history back to 1826. When combined with the existing Grafon operations in the area, Isero, bought in 2015, Grafton will have 53 branches and will be the Dutch market leader. More below
Lafarge Holcim this morning and CRH yesterday announced good trading conditions and while revenue development was not stellar overall YTD (down 1.8% L4L at Lafarge Holcim and up 5% at CRH) earnings growth was very good. At Lafarge Holcim operating EBITDA rose 14.5% TD and 32.9% in Q3 and at CRH it was up 14% YTD and 9% in Q3. Encouraged by good trading and expected cost savings Lafarge Holcim has upgraded it guidance for 2018 and increased the proposed dividend for this year to CHF2 from CHF 1.5 in 2015. The heavy materials companies have taken a long while to recover from the 2007/08 shocks but now appear to be on top of their game. Going into detail on the world giants in materials is not the focus of this note but the read across is positive
Talking of which we attended the Forterra Brick Fest and factory tour yesterday in Measham. Progress in the business has been impressive in recent years. Importantly net debt has been reduced and the company is investing in the future. The key is the investment in the new plant in Leicestershire which is highly efficient and can produce 90m bricks a year with just six people per shift in the plant. Under the ownership of Hanson and Lone Star development capital was scarce but having said that the latter approved the investment in the new plant we saw yesterday. The topic of concrete versus clay bricks was raised of course following Persimmon’s announcement and the comparison between the two types of product was discussed. Persimmon’s plan to make 80m concrete bricks a year should not alter the prospects for the mainstream brick makers and the plant is probably a year away from production. Forterra does not make concrete bricks though it does supply Persimmon with clay bricks at present.
The 180 day post IPO lock up on Lone Star’s holding in Forterra, 65% of the shares, is now ended. The stock is trading on a lower rating than rivals Ibstock reflecting the potential overhang; Lone Star has shown patience with the business and will not rush for the exit but will clearly wish to recycle the capital. With around 22p of EPS this year and a tad more next (forecasts are cautious at present) the share price at close last night of 180p looks great value in our view. The demand background for housebuilding volumes remains positive and outside the city centres residential demand is very firmly towards brick faced properties, both for new build and for improvement programmes.
SIG was the cream of the crop yesterday rising 2.7% to 89.7p. Would we be believed if we said it closed at 1084p less than ten years ago, 1st July 2007? The forward issue is whether there is anything of value left and you know, there probably is. The balance sheet is relatively sound. The new interim CEO has placed a £10,000 bet the share price will rise from his entry point at 89.7p yesterday. Mel Ewell has taken the role at SIG after 13 years at Amey which started well. We suspect that a successful new permanent CEO is more likely to come from within the industry than outside.
Atkins and Kier provided new news yesterday and both dipped a little, 2.7% and 0.8% respectively to 1614p and 1403p. The fact was that the news did not change perceptions of future earnings so the buy cases did not alter causing enthusiasm to drift. Atkins might drift a little more as the company deliberately played down the Trump Bump to infrastructure spending. Seeing is believing and it’s too early yet for Atkins to signal any improvement, indeed the company was adamant that investors should not be too eager to price in the potential impact of the $1 trillion infrastructure programme. Focus on that might also detract from a very good performance in the UK and US in the first half based on real programmes that are moving ahead. Outside of those two areas, which account for 70% of sales trading is mixed as some markets are challenging. The company reaffirmed its 8% margin target which should be achievable, in our view but with 6.6% at the halfway stage there is room for growth.
Grafton has faced a strong reaction to its interims, released 31st August, for several but the share price at 570p is climbing back slowly to the 600p+ level of late August. The negative reaction was over done in our view as it did not take into account fully the potential outside the UK which accounts for 25% of revenue and is growing fast, at least in Ireland and Holland. The acquisition announced today makes strategic sense from what we can tell but in the absence of both numbers and an affirmation from the company that the deal is earnings enhancing outsiders have no way of knowing the impact on earnings. The terms used by Grafton management in the release are angled towards the strategic nature of the deal rather than short term earnings. But experience of Grafton suggests to us that the G&M deal will be good for 2017 earnings when completed early next year.
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