Market Commentary - Housing, Infrastructure, Construction and Services -1st November 2016
The only relevant news today is from Renew Holdings which has announced the acquisition of Giffen Holdings Limited from its PE owners RCapital. Renew has paid £7m cash for the shares and to redeem loans in Giffen; given the acquiree’s revenue of £22m last year to end September and £0.7m PBT the price looks fair, though as we discuss below this is a turnaround from the prior years and we need to ask about what has changed. The HICS sector continues to show a number of small risers each day and most stocks drifting downwards a bit. Some have drifted, had a brief rally and then dipped again.
The only relevant news today is from Renew Holdings which has announced the acquisition of Giffen Holdings Limited from its PE owners RCapital. Renew announces it fill year results to end September on 22nd November. Giffen group specialises in electrical, signaling and power works across the rail infrastructure. Giffen is of the UK’s most successful companies operating in the fields of signalling, electrical engineering and specialist building services. The business has carried out engineering works on behalf of clients such as London Underground and Network Rail for over 50 years. It currently has four frameworks with Network Rail and six with London Underground to carry out mechanical, electrical, and power services on the railways. It employs 123 staff and has a direct employment model.
Renew has paid £7m cash for the shares and to redeem loans in Giffen; given the acquiree’s revenue of £22m last year to end September and £0.7m PBT the price looks fair, though as we discuss below this is a turnaround from the prior years and we need to ask about what has changed. Renew has acquired in an area of its strength, Amco Rail and we expect it is an ideal fit with existing operations and a good opportunity for Renew to expand on the Underground to complement its Network Rail work. More below
The HICS sector continues to show a number of small risers each day and most stocks drifting downwards a bit. Some have drifted, had a brief rally and then dipped again. The main four risers yesterday showed only small gains and all have a US earnings bias, which may be a coincidence. Balfour Beatty (up 0.6% to 271p), Homeserve (up 0.5% to 609p), Wolsleley (up 0.4% to 4249p) and Compass (up 0.4% to 1479p). There is no real link between all four and therefore probably no trend. Balfour Beatty dipped down to 265p at one stage recently but has since climbed within its 260-280p range. We pick out BBY as we suspect its news will be positive in the coming months and that Carillion was dead right, there is substantial intrinsic value in the business being masked by a number of bad contracts and weak cost and working capital management. Balfour Beatty looks cheap at current levels, in our view.
Berendsen has few friends at present and was the largest faller yesterday, down 2% to 965p. There is no strong reason to suspect that the shares will climb back in a hurry, in our view. It will take a long while for confidence as the issues were unexpected and seem to amount to poor day-to-day operations which outsiders cannot easily assess other than through consistent results. And given the timing of events were flagged to the market rather later than they should have been. Most other fallers were within the ebb and flow of trading but Travis Perkin’s fall yesterday to 1332p, down 1.7% has the company at its lowest valuation for some time and close to its post Brexit vote sell off level of 1348p reached on 27th June. Forecasts for the EPS out turn this year and next have slipped to the 120p level; 131p was expected a few months ago with further growth in 2017. So some share price adjustment was needed from the peak level of 2256p reached in mid July 2015. Our sense is that TPK is undervalued at this level but it may not be the lowest entry point in the short term. There a are a few too many concerns about trading in P&H, RMI and in residential new build at present and the only catalyst visible at present is the 23rd November Autumn Statement. It may also be that property profits will be subdued as the market cools. TPK is a great business and the current dip is in part cyclical, which was not factored into the company’s guidance as much as it might have been perhaps and Brexit induced fears. The latter may be valid or may not according to choice but obviously there is change the outcome of which is uncertain regarding extent and timing.
Back to Renew and Giffen. The acquiree was clearly in some difficulty in the year to September 2014 when revenue of £17.5m produced and PBT loss of £1.3m. Trading became much better in 2015 when £15.2m revenue created a loss of £1.2m at the PBT level, though that includes a £0.6m exceptional restructure charge and near £0.5m of interest costs (up from £0.2m in teh prior year), representing the changed ownership, so arguably Giffen was at break even in 2015. The turnaround in 2015 saw the company end the year with an order book up 300% at £25m, most of which is within frameworks and negotiated contracts which is exactly the way Renew operates. The group also owns a 33% stake in Switchgear and Substation Alliance limited which enabled it to enter high voltage markets; SSA (Sub Station Alliance) UK Ltd is a joint venture that brings together three rail and engineering specialists - Giffen Group, EPS UK and Electren UK Ltd. That area will also present opportunities for Renew. The deal appears to be a positive one for Renew in an area of existing operations, which reduces execution risk substantially. The company is expected to report EPS of 27-28p in its forthcoming results and, while the company does not say we suspect this deal with further improve earnings in the financial year just started for which 30p of EPS was expected prior to the deal.
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