Market Commentary - Housing, Infrastructure, Construction and Services 21st March 2017
Mears and Bellway provide results this morning, the former its full year numbers to end December 2016 and the latter interims to end January. There was very little movement among sector stocks yesterday. The sector is currently becalmed as the puzzle of what post Brexit Britain might look like unfolds.
Mears and Bellway provide results this morning, the former its full year numbers to end December 2016 and the latter interims to end January. Mears numbers are in line with revenue up 7% to £940m and adjusted operating profit up by 8% to £42m. The group results was held back by a £1.2m operating loss in Care as the company restructured its operations in that area; total revenue in the segment rose by 4% to £153m due to the full year impact of the Care at Home acquisition made in 2015. The company has downsized its Care operations to enable it to work with customers who value the proposition it offers; the statement this morning shows that the Care segment exited 2016 with an annualised revenue rate of £126m but with the charge rate per hour 14% higher than at the start of the year profitability should be achieved this year. The pipeline in Care is strong and good work is being won.
The issues in the Mear’s Care segment should not detract from the excellent and still improving performance in Housing; revenue in that area rose by 7% to £787m and adjusted operating profit was 4% higher. The lower margin in housing was due to several contracts being in the early stages of start-up. The work will yield improved margins this year as they ramp up. The company ended the year with net debt of £12.4m, versus a neutral position at end 2015 as a £10m payment on a deferred consideration was made and the organic growth in new work in housing absorbed working capital; the acquisition payment was a one-off and the working capital position will unwind. More below
The numbers from Bellway will not surprise the market. Revenue is up 6% to £1.2bn, 7% volume increase and an ASP slightly reduced to £256,140 due to an increased element of social housing in the mix. The operating margin has improved to 22% from 21.4% at the halfway stage last year. The efforts to grow the business towards 10,000 completions a year (4,462 units completed in 1H) are shown with the acquisition of 6,287 plots in the six month period. The company reports a high level of demand with the forward order book 18% higher now than this time last year at £1.4bn and the cancellation rate at 12% remains low. The only blot on the landscape might be that net debt rose to £175m from £59m last year; the company states the debt will reduce by the year end and points to average net debt of £106m in the period. From an investment perspective the expected volume and earnings growth at Bellway are a real plus but the net debt and the relatively low dividend (up 10% at the halfway stage), yielding just over 4% prospective are constraints on share price development.
There was very little movement among sector stocks yesterday. The sector is currently becalmed as the puzzle of what post Brexit Britain might look like unfolds. The data show that not much is changed; well we have not left yet! What does emerge from the data is that London’s position among global capitals is threatened as evidenced by comments from banks and other financial institutions and by developers and property agents. The best riser yesterday was Homeserve, up just 2.0% to 565p and G4S fell 1.8% to 296p to be the largest loser. The latter had some downbeat broker comment and in any event short term retracement was likely after a strong recent run. The next few weeks will see some shifts we expect as the end of the first quarter approaches and as Article 50 is triggered. From the current perspective the balance is towards the downside, in our view as the possibility of political turmoil and a hard Brexit loom large.
Mears is a company in more transition than most. Arguably companies are always in transition! In Housing Mears has successfully transformed its model to include a much more comprehensive offering to a changing market place. Five years ago it sold mainly maintenance services to Housing Associations. Today it can deliver a full range of support to housing associations, local authorities and PRS owners, ranging from project funding and new build through to day-to-day management and running of a housing provider; it is a registered provider (RP) in its own right and has been used to the HCA to “rescue” troubled RPs. In Care the market place issues have received substantial publicity. Mears has taken the initiative, more swiftly and comprehensively than most by withdrawing from around 25% of its workload (in terms of hours delivered) as it focuses on local authorities that want a more comprehensive and mature approach to managing their budgets and fulfilling their responsibilities to disadvantaged groups comprising mainly, but not exclusively, older people.
The outcome for investors of the actions of Mear’s management in 2016 will show through more fully this year. Performance improved last year but remains below the best the company can achieve. We will attend the result meeting later this morning. Market forecast for EPS this year are for a rise to around 38p which we expect to hear confirmed in guidance today. Ally that with a solid balance sheet and 94% of consensus revenue for 2017 already secure and the risks for Mears at 500p look to be very low. The stock is quite thinly traded so moves can be exaggerated but the underlying long term position is very sound.
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