Market Commentary - Housing, Infrastructure, Construction and Services 20th February 2017
Bovis Homes tells us of its results for 2016 this morning and Interserve provides an unexpected update on its troubled waste to energy business. Interserve’s news is bad and there is no guarantee it will not get worse. Bovis has come out with the best it can do in the circumstances and promised it will press the reset button on the way it approaches the production process and customer service. The sector performed well last week with an outcome a head of the markets 0.5% rise at around a 1% increase. The housebuilders were the best performers in the group, up by near 1.5%.
Bovis Homes tells us of its results for 2016 this morning and Interserve provides an unexpected update on its troubled waste to energy business. Bovis has come out with the best it can do in the circumstances and promised it will press the reset button on the way it approaches the production process and customer service. It’s normal in these situations for management teams to tell us that the short term may look bad but, you know what, the mid and long term looks great. Bovis follows the same pattern. It seems to have the markets in which it may succeed in the future and resources in terms of cash (£39m at year end) and landbank (18,704 plots) so the key issue is whether it has the right management. That will not be resolved until we know the new CEO and that person has the time to put the right imprint on the promised renewal of leadership and operational excellence. The numbers for 2016 do not look disastrous with revenue at £1.1bn, up 11% and PBT down just 3% to £155m but they could and should have been so much better. Bovis makes some observations on the market that indicate demand remains strong due to supply shortage and that lack of skilled labour remains an issue; nothing new there and Bovis has bigger issues perhaps. But at least they are saying nothing new or damaging for the industry as a whole. More below.
Interserve’s news is bad and there is no guarantee it will not get worse. The company’s waste to energy business has been known to be in trouble but today the announcement tells us that the financial implications are worse than previously expected with the £70m exceptional cost now likely to be nearer £160m. By squeezing the rest of the business the earlier write-off was just about manageable within existing facilities but the new, higher number is not. New debt facilities have been put in place which will allow borrowings of up to £573m which compares with an expected average level of borrowing in 2017 of £450m. Of course with litigation and insurances the position may be better than expected but, as outsiders, we have to assume it could possibly get much worse. Conference call at 8.30. More below.
It’s a busy week ahead as the December and June year ends update us on progress and prospects. Tomorrow Galliford Try will tell us its half year results and new CEO Peter Truscott will outline his thoughts on where the business is going in the future. On Wednesday Barratt Developments tells us it’s half year out-turn and Serco will reveal its performance in 2016. Thursday brings Finals from Howden Joinery, Morgan Sindall and Rentokil and Berkeley may say something about the market at its AGM. The week ends with Rightmove’s Finals on Friday which will include news on the housing market.
The moves on Friday last showed Compass getting support, rising more than its rivals to 1473p, up 1.7%. In our view there is no current reason to see the stock break through the 1500p level on a convincing basis and it is likely to stay in its range of 1350p to 1500p until it demonstrates the growth it sees in its markets. Interserve was the back marker on Friday falling 1.7% to 335p; the news this morning may have been anticipated by some but in truth the shares have struggled to break through 350p and the news today suggests that 250p is a more likely level at the kick off this morning.
Interserve will produce its numbers for 2016 on Tuesday next week but clearly ahead of that the board has seen some bad news that had to be told. The catalogue of bad stuff on the Waste to Energy operation includes all of the errors possible in contracting. It is an industry that consistently fails to learn and relearn with each cycle and Waste to Energy, given the lack of consistent technology and weak supply chain has been a trap even for the experienced operators.
The issue for Interserve shareholders is whether the new CEO, the successor to the departing Adrian Ringrose, will require an equity issue and whether the fundamental operations are in good enough shape to build a positive future. Our sense is that any incoming CEO should not want to be spending the first three years constantly unable to move the underlying operations forward due the burden of high net debt. We shall learn more about current market conditions next week but our belief is that they are challenging but manageable. The new person will no doubt want some disposals from non-core, such as welfare to work but on the whole the business is not in bad shape. But with the level of subsidy, Interserve shareholders are supplying to the waste to energy business being both high and still unknown the new incumbent will need to assess swiftly the direction of the business, the likely ultimate price for the waste to energy folly and the cash needs so growth in other areas is not starved. It’s a tough set of tasks in our view for which there are few obvious and available candidates.
In the meantime we shall see who wants to catch the falling knife that will be IRV’s share price. The company has tried to do the impossible and draw a line under its errors in waste to Energy but that will not really work this morning, we suspect and 250-300p is a likely range as some bad news was already in the price.
The situation at Bovis, in contrast to IRV is more easily recoverable, in our view. Clearly 2017 will be a much more subdued year than expected as the company proceeds with its transformation programme. That will be expensive as the company needs to attract new staff, restructure what it does, create an adequate supply chain and restore its public image to potential buyers. But the basis to that exists as the landbank at 18,794 plots supports 3,500-4,000 completions this year. The mix in the plots should allow the ASP to rise again from £254,900 which was 11% higher than the prior year. As stated earlier the company has the cash resources to re-invest in the landbank. The company tell us that output this year is likely to be 10-15% lower in terms of competed units compared with 2016 and back to a “normal” level in 2018.
The issue is whether there is value in Bovis at 840p. The dividend has been increased 13% and is 45p for last year so investors are being bribed with their own money, though the yield is not above average. Our sense is that investors can get better risk reward elsewhere in the housing sector so until the new CEO appointment is clear many will avoid the stock because there is no need to own it. Buying in anticipation of a bid is gambling not investing!
Moves last week
The sector performed well last week with an outcome a head of the markets 0.5% rise at around a 1% increase. The housebuilders were the best performers in the group, up by near 1.5%.
Morgan Sindall took the honour last week of being best riser, up by 4.0% ahead of its results later this week. The stock has had a strong start to the year, up 15.1% YTD. Sometimes results announcements show the journey to be better than the arrival but we suspect that MGNS will have some very good news indeed and a post results dip will be avoided.
Carilllion was the worst performer in the week down 4.1%. Its trading results for 2016 to be released on 1st March will be quite positive we expect and there will be a major commitment to debt reduction. The size of the pension deficit will be larger than last time, based purely on yields falling but we expect the company to be able to hold deficit payments at no higher than the current level. As we keep saying, the road to redemption for Carillion is a long one but it will get through.
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