Market Commentary - Housing, Infrastructure, Construction and Services 1st February 2017
Telford Homes has spent £30m on an ex London Electricity site in Tower Hamlets, it is announced this morning.The sector moves yesterday were mainly positive though there was no substantial shift in any direction.
Telford Homes has spent £30m on an ex London Electricity site in Tower Hamlets, it is announced this morning; Redhall’s AGM update today includes a rarely written sentence in its releases, “trading in line with expectations”, so perhaps it really has turned a corner; and Epwin says it traded in line in the year to 31st December but is concerned in the short/mid-term about the effect of Brexit on demand for its RMI focussed products and on the costs of imported raw materials. More below.
The sector moves yesterday were mainly positive though there was no substantial shift in any direction. The best improver was G4S which rose 1.5% to 255p following favourable broker comment; 8.9m shares were traded. We suspect that the market is still not quite right in its assessments of the prospects for this company and 300p is a more realistic level. Rentokil also rose by near 1.5% to 228p and is nearly back now to the level reached pre Trump’s triumph. Its valuation is stretched a little in the UK context at near 22x 2016 earnings but alongside the main US rival, Rollins, it looks cheap.
Atkins fell 1.5% to 1462p, giving back some of the previous days 5% gain as there was nothing substantive to add to press reports that US rival CM2H is interested in a natter about merging. The Atkins move was no real surprise yesterday but as we said, at this level and on 12.2x prospective p/e for the year to end March it looks good value even with an M&A deal. The pension deficit is often cited as a drawback, £33m a year and rising each year to 2025, is a large burden, even with a £300m+ deficit. The company works until mid March each year just to fund the worst case scenario the Trustees can imagine, that may not occur for many years hence. While the “political” climate for doing something other than write a big cheque is not great there is a number of alternative structures emerging that may answer the Trustees concerns without taking a large element of cash from the business that reduces the company’s growth potential.
We have watched Telford’s growth from a distance but record its exploits to you when we can. £30m for a site of just under one acre may sound very expensive mainly because it is. The key is its location, which is just by Bethnal Green underground, so it has a Gross Development Value of £95m. Defining a good place to live by the proximity of transport links (ie the ease with which you can get away from the place) is a recurring theme of all urban societies and is not going away. Looking at this deal Telford seems to be taking a greater risk than normal, unless there are contractual conditions not stated. Detailed planning permission has yet to be obtained, the build period is long (starts in 2018 and it finishes in 2021) and there is no reference to pre sales or lets at present. Telford’s previous risk projects in developing dwellings in subprime areas of London have worked very well for shareholders in the past. As outsiders we are a tad concerned, based on the information provided today and on current Brexit uncertainties about the London jobs market that this is a risky one for the company. Telford’s track record suggests our concerns are ill founded but the stakes are higher than average from what we can see.
Redhall was a basket case for many years, especially following the ill-timed and ill-judged acquisition of Chieftain in October 2008; yes, it was a long time ago! It now seems to have reached a stable point in its development in terms of products and structure which is allowing steady growth. Its core products and services that are now focussed on high end manufacturing for the nuclear, oil and gas and architectural sectors, along with specialist services in nuclear, process industries and telecoms. These can provide good margins and are growing. If it does achieve a successful turnaround the very patient investors, mainly Henderson, have created a good case study in working a company through substantial difficulties. The company is expected to deliver 1.7p of EPS in the year to September 2017 and grow thereafter. The valuation with the share price at 11p at close last night looks to be inexpensive.
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