Market Commentary - Housing, Infrastructure, Construction and Services 21st October 2016
Michelmersh, the UK’s fourth largest brick maker, has reported this morning that trading and production have been a little more difficult than anticipated in its previous market guidance. There was very little movement in the market or the HICS sector yesterday. As we suggested a few days ago sector stock prices appear to be in the Doldrums; most HICS stocks in our universe fell yesterday but the largest faller was down just 1.2%
Michelmersh, the UK’s fourth largest brick maker, has reported this morning that trading and production have been a little more difficult than anticipated in its previous market guidance. The update covers the YTD with its year end being 31st December. The expected price increases have not been possible to achieve and output yields have dipped backMichelmersh, the UK’s fourth largest brick maker, has reported this morning that trading and production have been a little more difficult than anticipated in its previous market guidance. The update covers the YTD with its year end being 31st December. The expected price increases have not been possible to achieve and output yields have dipped back to historic levels due to materials supply changes. The consequence of the issues it has faced is that revenue and earnings will be at or near last year’s level. In 2015 revenue was £291m, operating profit was £4.7m and EPS 4.4p; the market has previously expected EPS of around 4.9p for this year and the shares closed at 63p last night. Read across to quoted rivals Ibstock and Forterra is likely to be limited as both had indicated previously that trading was tougher than expected and guidance has incorporated a high level of caution and lower earnings in 2017 than this year; the update today from Michelmersh is just them catching up with the peer group, in our view. More below.
There was very little movement in the market or the HICS sector yesterday. As we suggested a few days ago sector stock prices appear to be in the Doldrums; most HICS stocks in our universe fell yesterday but the largest faller was down just 1.2%. The general trend of news is negative. There are many December year end companies in the sector and they will be at or near establishing 2017 budgets, the imminent half term break notwithstanding. It’s hard to believe that those discussions will be about substantial, if any, revenue and profit growth next year, especially for companies with mainly UK exposure. Of course events may turn out differently, depending on Brexit progress, or lack of it according to your view. Our sense is that sector prices for the main stocks to be affected already anticipate a moderation guidance. Hence the lack of movement in prices and when warnings have been issued in recent days (eg Travis Perkins) collateral damage has been very small and short lived (Grafton nudged lower on the TPK news but has bounced back).
Homeserve was the leader yesterday rising 3.5% to 624p. Its half year ended on 30th September and it reports its results on 22nd November. It did not issue a trading update at or near the period end but as the price is up 8% since the end of the half year the market appears confident of progress. And that is despite COO selling 60,000 shares at 570p announced on 30th September. The first half numbers are always a poor guide to the full year out-turn at Homeserve due to seasonality but we expect the update will be positive and the tailwind of FX from $ and € earnings very favourable. Doewnard moves were the order of the day but as stated the shift was muted. The weakest performer was Carillion, down 1.2% to 250p but we read very little into that shift specifically for that company. The sector is waiting for teh Autumn statement, due on 23rd November to guide prices. In teh meantime it will ebb and flow with market sentiment and specific comapny news. Several updates are due in mid November.
Back to the brick makers. Michelmersh point to falling output in the industry and small increases in market demand. That sits oddly with the housebuilders increasing their output. The explanation has been provided by others that the distributors have adequate stock and in the mainstream Builders Merchants are cutting down on stock holdings in their distribution chains. Whether this is a one off adjustment or a trend remains to be seen but if new build volumes are sustained and RMI is stable then it points to a short teriod of adjustment. The lower level of brick sales volume has an impact on pricing; prices rose strongly in 2013 and 2014 but have since given way to more modest progress. FX changes seem likely to be favourable for the UK producers (imports account for c 10% of UK brick sales) but the impact is delayed as purchases will most likely have been hedged for currency changes for a six to 12 month period. We are entering the phase when price discussions for next start in earnest or have already begun and the new level of £ will impact on those negotiations. The cost of the brick themselves account for c 1% of the price of a standard three bed dwelling.
The important element to bear in mind is that the brick makers are profitable and the UK market is relatively stable, as available capacity is relatively fixed in the short and mid term. New, more efficient capacity is being brought on stream and incremental improvements are being made at all brick makers but the increase in overall capacity will be limited. So we are confident the brick makers will make progress in the mid term. As far as Michelmersh is concerned this update is, we believe simply brining them into line with what its peers and the Merchants have been indicating for several months. No doubt there will be some impact on the share price today, which closed at 63p last night but the impact should be muted, in our view.
to historic levels due to materials supply changes. The consequence of the issues it has faced is that revenue and earnings will be at or near last year’s level. In 2015 revenue was £291m, operating profit was £4.7m and EPS 4.4p; the market has previously expected EPS of around 4.9p for this year and the shares closed at 63p last night. Read across to quoted rivals Ibstock and Forterra is likely to be limited as both had indicated previously that trading was tougher than expected and guidance has incorporated a high level of caution and lower earnings in 2017 than this year; the update today from Michelmersh is just them catching up with the peer group, in our view. More below.
There was very little movement in the market or the HICS sector yesterday. As we suggested a few days ago sector stock prices appear to be in the Doldrums; most HICS stocks in our universe fell yesterday but the largest faller was down just 1.2%. The general trend of news is negative. There are many December year end companies in the sector and they will be at or near establishing 2017 budgets, the imminent half term break notwithstanding. It’s hard to believe that those discussions will be about substantial, if any, revenue and profit growth next year, especially for companies with mainly UK exposure. Of course events may turn out differently, depending on Brexit progress, or lack of it according to your view. Our sense is that sector prices for the main stocks to be affected already anticipate a moderation guidance. Hence the lack of movement in prices and when warnings have been issued in recent days (eg Travis Perkins) collateral damage has been very small and short lived (Grafton nudged lower on the TPK news but has bounced back).
Homeserve was the leader yesterday rising 3.5% to 624p. Its half year ended on 30th September and it reports its results on 22nd November. It did not issue a trading update at or near the period end but as the price is up 8% since the end of the half year the market appears confident of progress. And that is despite COO selling 60,000 shares at 570p announced on 30th September. The first half numbers are always a poor guide to the full year out-turn at Homeserve due to seasonality but we expect the update will be positive and the tailwind of FX from $ and € earnings very favourable. Dowwnard moves were the order of the day but as stated the shift was muted. The weakest performer was Carillion, down 1.2% to 250p but we read very little into that shift specifically for that company. The sector is waiting for the Autumn statement, due on 23rd November to guide prices. In the meantime it will ebb and flow with market sentiment and specific company news. Several updates are due in mid November.
Back to the brick makers. Michelmersh point to falling output in the industry and small increases in market demand. That sits oddly with the housebuilders increasing their output. The explanation has been provided by others that the distributors have adequate stock and in the mainstream Builders Merchants are cutting down on stock holdings in their distribution chains. Whether this is a one off adjustment or a trend remains to be seen but if new build volumes are sustained and RMI is stable then it points to a short period of adjustment. The lower level of brick sales volume has an impact on pricing; prices rose strongly in 2013 and 2014 but have since given way to more modest progress. FX changes seem likely to be favourable for the UK producers (imports account for c 10% of UK brick sales) but the impact is delayed as purchases will most likely have been hedged for currency changes for a six to 12 month period. We are entering the phase when price discussions for next start in earnest or have already begun and the new level of £ will impact on those negotiations. The cost of the bricks themselves account for c 1% of the price of a standard three bed dwelling.
The important element to bear in mind is that the brick makers are profitable and the UK market is relatively stable, as available capacity is relatively fixed in the short and mid term. New, more efficient capacity is being brought on stream and incremental improvements are being made at all brick makers but the increase in overall capacity will be limited. So we are confident the brick makers will make progress in the mid term. As far as Michelmersh is concerned this update is, we believe simply bringing them into line with what its peers and the Merchants have been indicating for several months. No doubt there will be some impact on the share price today, which closed at 63p last night but the impact should be muted, in our view.
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