Market Commentary - Housing, Infrastructure, Construction and Services 20th October 2016
A profit warning from Keller today is the main news today. Travis Perkins was the back marker yesterday following its news on trading. It fell 4.5% at the close to 1422p having been down over 7% at one stage. The conference call was reassuring regarding the competence of management to handle events. The best performer yesterday was Rentokil which rose by 4.5% to 235p
A profit warning from Keller today is the main news today. But that headline should not distract from the company indicating that the US and Europe (70% of group revenue) are trading well. The problems are in Canada and sub-Saharan Africa where conditions are depressed and in Asia Pacific (APAC) where markets are said to be difficult. So the out-turn for this year will be 15% below current market expectations and there will be a £10 exceptional charge for restructuring. The upside is that the order book is 15% higher than this time last year and 2017 is looking good.
Keller is a difficult stock to own. We look at it as a forward indicator so for US and Europe it is positive. This, however, is not the first time it has been caught out by the performance in APAC being weaker than expected. The amount of damage to the P&L is not large on this occasion, based on the data provided. Th information does not suggest that there is worse to come. Credibility is affected again though as it’s hard to trust the guidance. The consensus was for 92p of EPS this year and 100p for next; the shares closed at 886p last night and have been drifting downwards since 6th October. For a world leading business the valuation is low, that clearly reflects the lack of reliable guidance regarding the numbers.
Travis Perkins was the back marker yesterday following its news on trading. It fell 4.5% at the close to 1422p having been down over 7% at one stage. The conference call was reassuring regarding the competence of management to handle events. John Carter’s authority and long experience of a wide variety of UK trading situations being a crucial element. The sense we got from the meeting is that there is clearly a need to step back a little and reassess the pace at which the business is implementing its strategy. Market conditions are not as anticipated and are less predictable in a post Brexit world than seemed likely three years ago when the strategy was put in place and even four months ago (pre 23rd June) when the pace of growth was slowing but only mildly. The news of tougher trading conditions in some areas should not detract from the good performances in Consumer and Contracts. The market was looking at performance this year at the same level as last, around £415m adjusted EBITA (130p of EPS) and we suspect that will be the out-turn, including property profits. So at 1422p the stock valuation is not stretching but the uncertainty ahead of market demand and the intended work to be done as a result of the Plumbing and Heating review will make investors wary.
The best performer yesterday was Rentokil which rose by 4.5% to 235p. The company offers a compelling combination of steady organic growth, low risk acquisitions that boost the revenue and earnings and a well thought out strategy that is being executed efficiently. EPS forecasts at just below 10p for this year may be on the low side given FX moves and the contribution of recent acquisitions. The stock is no longer cheap but its seems unlikely to let down investors. Capita has retraced as we expected it might. It closed up 2.6% last night at 619p and may gain further strength as buyers recognise that it was oversold and that it may not need an equity fund raising. The data suggests that 700p is a realistic target.
We attended the Interserve meeting on RMD Kwikform yesterday. Replacing the earnings of Kwikform was always going to be a big ask which is why there was some surprise in the first instance when the Strategic Review was announced. The plans announced yesterday seemed sound enough in terms of how the operations will be run though management was sketchy on why Middle East market conditions are expected to bounce back strongly as shown in the Appendices to the presentation. The answer that there are plenty of other countries that it can sell into if the Middle East remain tricky was a bit thin. Entering a new area is expensive and possibly inconsistent with the margin aspirations. There was enough in the presentation to give management the benefit of the doubt and data that suggest we shall see improved performance in the future. The update is due in mid November and we expect that management will tell us that trading is in line across the business but possibly that the Glasgow project will cost nearer to £100m and not the £70m charge already indicated. That may impact adversely on year end net debt but we are sure the company has a plan to mitigate some of that. After a heavy loss earlier in the day shares fell by just 0.8% to 366p. Management would not be drawn on the details of current trading but clearly know that if there are substantial issues the “rules of engagement” are such we would know by now. That means that adjusted earnings of around 60-65p a share are likely this year which dos make the valuation a low outlier for some good reasons; a discount is justified but the current level seems a harsh assessm
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