Market Commentary - Housing, Infrastructure, Construction and Services 19th October 2016
Rentokil and Travis Perkins updated the market this morning. RTO has told us that organic sales at CER were up 3.1% in Q3, 2.7% YTD. That is clearly positive in a low inflation world.Travis Perkins has a slightly different story to report as it has become concerned enough about slowing growth (just 2.0% L4L in Q3 with a 4.1% decline in plumbing and heating) that it will take swift action to close 30 branches at the cost of up to £50m. Interserve was the best performer yesterday ahead of a CMD today which will tell us why it has decided to keep Kwikform following its strategic review
Rentokil and Travis Perkins updated the market this morning. RTO has told us that organic sales at CER were up 3.1% in Q3, 2.7% YTD. That is clearly positive in a low inflation world. There are lots of other numbers for sales growth as well including 33.1% in Q3 for the sales increase that will be reported at Actual Exchange rates, equal to 16.6% at CER. FX is clearly going to do very strange things to the comparisons. Importantly the data indicates solid organic growth, continued level of acquisitions 13 in Q3 (making it 33 businesses YTD with a combined annual revenue of £108m) and therefore imprioved overhead absorption that will help margins to grow. More below.
Travis Perkins has a slightly different story to report as it has become concerned enough about slowing growth (just 2.0% L4L in Q3 with a 4.1% decline in plumbing and heating) that it will take swift action to close 30 branches at the cost of up to £50m. Around one third of the exceptional cost will be cash costs and it be taken as a charge to the P&L this year. The company points to the EBITA outturn this year being slightly below the current consensus of £415m and states that it’s “still too early to predict demand for 2017”. The comment about demand next year needs qualifying, we believe and that is likely to happen at 8.00 with the conference call. The sales update from Travis Perkins is a tad worse than expected and the intended closures begs questions about the strategy of gaining market share to exploit its scale, though the company reiterates its commitment to that today. It would be easy to say this is a blip but, with Brexit uncertainty, progress in its key markets is far more uncertain that it was when the strategy was announced, three years ago. The short term issues are clear and the long term benefits very difficult to see. More below.
Interserve was the best performer yesterday ahead of a CMD today which will tell us why it has decided to keep Kwikform following its strategic review. It rose 5.4% to 369p. The company is not expected to comment on current trading today. There were few losers in the sector yesterday with just Grafton down 0.3% and Berendsen down 0.5%; both moves were just the ebb and flow of trade in our view.
Rentokil’s transformation in the last three years under Andy Ransom has been remarkable. By increasing the focus on what it does best, pest control, on an international basis the top team has shown how unnecessary the struggle between 2008 and 2013 was as the company grappled with underperformance in Citylink and IFS and ignored the opportunity that stared them in the face, or so it seems now. There is still plenty of growth for the company to aim for in Emerging markets , which showed revenue growth of 20% in Q3 and in its growth markets were sales were up 26%. All of the Q3 acquisitions were in emerging or growth areas. At 225p at close last night RTO remains good value and cheap alongside it best comparator, US based Rollins.
Travis Perkins will no doubt have a lively conference call at 8.00. Along with its mainstream Merchanting rivals Grafton and Wosleley, it continues to find the market for copper based and boiler products in Plumbing and Heating in the UK very difficult. There is limited evidence that the strategy of using the advantages of scale are working in this segment; the company clearly has that conclusion and has announced today a full review of this segment, which will be communicated next year. That too may involve a cost. Weak demand, changing customer behaviour and the pull forward of sales in 2102-14 with CERT, CESP and ECO have created conditions that all the major Merchants are struggling to manage and all have announced reviews and exceptional restructure costs.
In other segments Travis Perkins has performed reasonably well and the 8am call will help us measure progress against the markets in which it operates. Q3 sales in General Merchanting were up 0.6% L4L, in Consumer L4L sales were up 6.3% and in contracts by 5.7% L4L. The rise in General Merchanting while positive is lower than was incorporated in guidance and we suspect the company’s budgets, hence the swift action. The company points to margin being well managed in the GM segment but makes no comments on sales performance versus the market. It does make a comment on relative performance in Consumer where it believes it took share and grew faster than the market.
In conclusion on Travis, the content of the messages this morning is not wholly unexpected but perhaps a tad below where the realists were forecasting. The strategy has not become invalid but the closure of branches, which usually has a slow payback in the industry, is a setback. The key issue is that there is a slowdown in the market which is partly cyclical, we believe but exacerbated considerably by Brexit uncertainty. Big targets were set for 2020 in 2013 and in this industry a cyclical setback in that long period was inevitable. The issue now is the depth of the slowdown and Travos Perkins is right, it’s still too early to tell. And ex Government Ministers telling the independent Bank of England that it needs to raise interest rates is not aiding a confused situation! The news today is not just about this year but also about 2017 and beyond so forecasts will inevitably fall and forecasts for the out-turn for TPK next year are unlikely to show much, if any, progress. The shares closed at 1487p last night, tin hats today!
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