Market Commentary - Housing, Infrastructure, Construction and Services 22nd March 2017
Redrow has issued an unexpected trading update today and has organised a visit to its Colindale site on 4th April and Kingfisher’s final results for the 12 months to end January 2017 are released as expected.
Redrow has issued an unexpected trading update today and has organised a visit to its Colindale site on 4th April and Kingfisher’s final results for the 12 months to end January 2017 are released as expected. Redrow’s news comes five weeks after the interim results were announced. The new news is that trading has been stronger than expected (prices and volumes) so management is confident it will hit at least £306m of PBT in the year to end June 2017, 22% higher than the £250m last year; the reporting accountants and the main bank to the company have signed off on the number. No other detail is provided and the estimate is not much different from market consensus, some of which may not include the positive impact of the acquisition of Radleigh Homes. Redrow’s price has slipped a tad since the near all share proposed offer for Bovis so this provides a sensible underpinning and the reasons for it are clear.
We are about to enter a sticky patch for the house builders in our view, in terms of macro news flow. There are an increasing number of articles suggesting that the era of ultra-low interest rates is starting to end. Average house prices are some 7x average incomes, higher in London. ONS yesterday revised downwards its estimates of house price rises in November and December 2016; OK it was from 7.2% in December, for example down to 5.7% but that is still a high level compared with income growth. The new house builders have had a strong run YTD as they are the main source of supply, in a market in which many home owners are staying put and waiting to see what post Brexit Britain looks like. Remember March last year provided a strong comparator as there was a buying frenzy 12 months ago ahead of Stamp Duty changes. There is no real evidence that the prospects for the housebuilders has altered from what we can see, on an 18 month view but the news flow is likely to be less helpful than recent information.
Kingfisher’s group level numbers look positive with 2.3% organic sales growth at CER, 8.7% reported at AER and adjusted operating profit up 13.5% at AER. The group plan for improvement is said to be on track but we are just over one year in to a five year plan so it’s still not fully proven. We look at Kingfisher mainly to see read across to the UK and the news is positive enough to show good market conditions and yet not so positive it raises alarm bells for the performance of rivals! L4L sales were up at B&Q and Screwfix by 5.9% to a reported level of near £5bn. B&Q saw sales fall by 3.3% to $3.7bn as the planned store closures proceeded but rose 3.5% L4L. Screwfix sales rose by 23% to £1.3bn (14% L4L) said to be due to specialist sales teams in plumbing and electrical areas and the roll out of 60 new stores bringing the total to 517 at the y/e; the new plan is to take the total up to 700 which is quite aggressive! That number is not dissimilar from the Howden’s target so clearly they are using the same population data analysis! The Kingfisher target for stores is something to which we expect other Merchants will react but they already must have expected it so what has really changed for them. Not much, it would seem.
The Merchants had a good day on Tuesday 21st with Travis Perkins, SIG and Grafton being the leaders for most of the session. In the end only the first two ended in positive territory up 1.6% and 0.2% respectively and were two of only three risers on the day. Grafton closed down 0.5%. The support for the Merchants is welcome though we suspect that if housebuilder news flow is less positive there may be some adverse impact on the Merchants. We are also concerned about disintermediation of the Merchants’ role in materials distribution. It has already had a significant adverse impact on the Plumbing and Heating segment, of course. But as Merchant destock have less samples available at their branches and using tablets and phones gets even easier and third party logistics improve the role will alter much further. The scenarios are many and too much for a morning note. So far the main Merchant’s have ridden the wave with their internet offerings allied to smaller stores and in one case the unique Selco format.
Berendsen was the back marker, down 5.4% as one of the big brokers highlighted what we said last week, that the company is trying to do too much, too fast in a company that was pretty good to start with and, after two profit warnings in less than a year, demonstration of competence at running the existing operations is a priority. The shares closed at 812p and while the prospect of the third profit warning is low, given the company’s markets and positioning with so much change it cannot be ruled out. While the new CEO’s track record at his former “home”, Invensys, might be very good there is little evidence in the public domain that the same is true for the other newbies he has appointed as it is not usually publicised. At 812p at close last night the shares may be harshly treated with 63p of EPS expected this year but a level of change in the business that seems to border on hyperactivity has raised the level of risk.
Apologies if we seem a bit negative this morning. The sector usually does well in Q1 and that is true this year. But the good news flow we have seen in most cases we suspect will give way to a bit of profit taking as we end the quarter, as Article 50 blues hit us as the press focusses on that and, as stated earlier, inflation increases as FX hedges expire and the 15% devaluation bites harder and, as stated earlier the prospect of high interest rates. We remain positive about Infrastructure providers, FM outsourcers with transparent accounts, companies with well invested capital and sustained demand (e.g. the brick makers) and some companies with wide international exposure. But valuations in some areas look stretched if the news flow worsens and growth slows.
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