Market Commentary - Housing, Infrastructure, Construction and Services 18th October 2016
News this morning comes from Bellway, the housebuilder, which is still partying like it was 22nd June and the world was not about to change. It has released its finals to 31st July today.
News this morning comes from Bellway, the housebuilder, which is still partying like it was 22nd June and the world was not about to change. It has released its finals to 31st July today. The data from the housebuilders does not suggest change is on the way and Bellway reports strong demand continuing, with a 13% net rise in reservations since the start of it new financial year, praising the BoE cut in rates as a contributory factor. The numbers show revenue up 27% last year to £2.2bn (13% growth in both volume and ASP) and operating profit up 37% to £429m. More below on Bellway. The more interesting issue is probably around how long the factors causing the housing market to have high demand might continue. Bellway cite high employment, low interest rates, mortgage availability and government support as the key factors. Recent moves in interest rates in the market at the long end suggest the outlook for UK interest rates may be more cloudy that expected as a 20% fall in the currency has to show inflation as some point.
Grafton is getting back in the groove with a sector leading performance yesterday which saw the shares rise by 2.7% to 524p, the highest close since the results on 31st August. The charts show that the stock appears to have reached a floor and is now recovering. The shares have been oversold, in our view and news from Travis Perkins tomorrow on its recent trading will provide a guide to UK demand and pricing. 25% of Grafton’s revenue is from Euroland and of that 20% is from Ireland and that does nor seem to have been factored in fully. With EPS at around 41-43p this year (depending in part on FX) GFTU is still good value, we believe.
G4S was the backmarker yesterday falling 3.1% to 234p. The move was a simple retrace of the rise from the previous session triggered by favourable big broker comment. Nothing has changed at G4S just the temporary broker noise level and some of them now realising that it is probably undervalued and that the debt position is not ideal but could improve rapidly, with disposals and operating cash flow. It is trading on around 14.5x 2016 earnings earnings while peer group stocks are on 18-22x current year earnings. The big brokers are right in our view and the price momentum should be sustained at some point, the catalyst in the short term is more likely to be good disposals though the year end trading update should also be very positive.
Bellway’s numbers are stunning and along with its housebuilding peers is delivering high levels of ROCE (28% in Bellway’s case) that are highly unlikely to revert to the mean through competition because building a land bank is a long and expensive exercise. The history shows though that they are not sustainable every year as the market cycle turns and the conundrum at present is where we might be at in the cycle, currently distorted by Brexit. The numbers from Bellway for last year are very good. Revenue and operating profit have been mentioned but other metrics such as net cash (£27m), new plots added (9,555 versus completions last year if 8,721), EPS (+42%), Dividend (+40%) and net margin 22% all suggest that the company is doing well. It took its chance to expand in the South in recent years and it has reaped a good reward with growth to 19 divisions and a rise in ASP and completions.
The impact of Brexit has yet to unfold and while conditions in the South of England for properties above £650,000 (which includes Bellway’s stalled development at Nine Elms) conditions in the rest of the UK (where 80% of the population live)appear to remain positive. The market is becoming rightly cautious about the housebuilders, which on a three year view are well ahead and a bit of profit taking is going on.
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