Market Commentary - Housing, Infrastructure, Construction and Services 1st March 2017
CRH, Carillion and Costain all have their finals for 2016 released today. Wolseley has new CFO, Mike Powell, who joins from BBA Aviation. Mitie has also made the announcement that it has disposed of its healthcare operations to private equity for £2 plus £9.5m, to be used to achieve turnaround and to cover trading losses.
CRH, Carillion and Costain all have their finals for 2016 released today. Wolseley has new CFO, Mike Powell, who joins from BBA Aviation. Mitie has also made the announcement that it has disposed of its healthcare operations to private equity for £2 plus £9.5m, to be used to achieve turnaround and to cover trading losses. The company announced an impairment in this operation in September last year of £115m. Today an additional loss of £37m is announced for this operation comprising operating losses, the £9.5m payment and write-offs. Ruby’s venture into healthcare proved to be an expensive one for shareholders and the same can be said for a few others of Mitie’s recent acquisitions. This is good news for the company as it allows focus on the space in which it has proven real expertise, FM. The company has for some time indicated that a reverse premium might be needed to dispose of healthcare so it’s not a surprise.
CRH is a much larger entity than our normal coverage but its exposure to heavy materials in the UK provides read across. The headline numbers from CRH are positive with revenue up 15% on a reported basis and EBITDA 41%, 4% and 10% respectively on a pro forma basis post the Lafarge/Holcim deal. The company states as so many have that the Brexit issue did not cause the hiatus expected and that 2017 should see further progress in its UK operations. It achieved strong growth in its UK Cement and Lime operations, despite modest market growth, it claims.
Carillion’s numbers for last year are in line with expectations and the company is not changing its approach; it will continue to trade through the balance sheet issues which hinder the rating. The news today contains a stronger push on reducing net debt in the mid-term and the increase in period end net borrowing to £218m (up 28%) is due almost entirely the FX. Revenue last year rose by 14% to £5.2bn, mostly organic and at AER and operating profit, a signalled was up 1%. The earnings were constrained, as expected by a reduction in PPP/PFI profits and in the Middle East operations. The dividend has been increased by 1%. There will be some concern the pension deficit rose to £663m on an IAS 19 basis, post deferred tax but a great deal of that is just actuarial imagination and a fall in gilt yields to 2.7% from 3.9% last year. More below
Costain was one our five picks for this year (at 355p) and to date has been the second weakest performer (up 8%) but the news this morning may help the buy case. Revenue in the 12 months is up by 26% to £1.7bn and operating profit rose by 24% to £41.1m; the dividend has been raised by 15% to 12.7p. Other metrics are positive with the net cash position at £140m and the order book maintained at £3.9bn. The earnings numbers are constrained by the continuing problems with the Manchester waste project for which provisions of £15m were made in 2016; it not hard to see how the numbers might look when this issue is resolved! Costain’s waste project is not life threatening for the corporate; it is being managed in our view and is unlike the scale of the problem at Interserve. More below
The other four picks for this year were Forterra (up 10%), Morgan Sindall (up 33%), SIG (up 9%) and MJ Gleeson (up 6%). So far, not bad!
Babcock’s update helped it to top our table with a 7.2% rise to 948p. So the company’s announcement did the trick at least yesterday. The company announced a Divisional restructure, an action which should cause some concern as the associated costs can hide issues and divisional continuity and comparisons are lost for good. Call us cynical if you wish. The truth is that investors liked what they heard from the company; well at least they did yesterday! BAB’s market position with MoD is impregnable and it’s only when it has stepped outside that area (other than in nuclear perhaps) where is has failed to replicate its UK military pre-eminence. Also a restructure at this stage may make sense as the CEO is quite new but as he is more senior than the average it seems to be a big effort for what may be a stop-gap succession. Mitie was the next best riser, up 3.3% to 207p as it regained support.
There were only two losers yesterday in the 22 most closely watched stocks, Grafton and Polypipe. In both cases we see no reason for declines other than due to trading flow.
The trading picture this morning from Carillion is positive in its mainstream Support Services operations in which revenue rose 7% to £2.7bn (52% of the group total) and operating profit rose 25% to £183m. The performance was good aided by substantial contract wins in 2015. The out-turn in construction outside the Middle East was also positive with operating profit up by 21%. It was flagged at the update that profits from the Middle East and PPP would be lower, partly due to timing issues, especially in the latter where the pipeline remains strong. The order book remains good with £4.8bn of work won in 2016 and the order at £16bn. The pipeline is at £42bn. The numbers this morning should not alter expectations for 2017, for c 36p of EPS and the news on the dividend should be well received. We expect CLLN will strengthen on the back of the news today after closing last night at 2017. The news that it will step up the debt reduction programme will be well received.
Costain is delivering well on its core strategy and working hard to help investors appreciate that it does much more than just contracting. That should help the rating but it’s a slow process. The company is becoming more essential to its customers in its core engineering services operations and that will continue. The news today is likely to cause forecasts to rise a little as the 2016 out-turn is a little ahead of expectations. The swing factor is the cost of Manchester which was higher than initial expectations last year and will impair this year’s numbers. Market estimates of 33p of EPS this year are likely.
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