Market Commentary - Housing, Infrastructure, Construction and Services 22nd May 2017
There is little new news this morning. Civitas, the social housing REIT, has spent another £6m of its £350m equity fundraising. Mortice, a small quoted FM company has won two new contracts worth £2.3m pa in revenue. There is no further news on the proposed acquisition of Berendsen. News flow from AGM updates and March and September year ends flows strongly during the remainder of this week.
There is little new news this morning. Civitas, the social housing REIT, has spent another £6m of its £350m equity fundraising on buying the freeholds of supported living properties and leased them back; the yield is in line with expectations but the company is only inching along with getting stock. Mortice, a small quoted FM company has won two new contracts worth £2.3m pa in revenue with BMW and Surrey and Sussex Police; there is a number of small FM companies (some quoted, most are private) that are winning such contracts that the larger companies ignore as being too small, especially when their overheads are applied. It is allowing the small guys to grow and perhaps at some point compete at a serious level.
There is no further news on the proposed acquisition of Berendsen. The shares closed at 1091p on Friday last despite the intended cash plus shares offer being at 1173p and having improved slightly with the Elis share price rising 2.9% on Friday to €20.06 (the proposed offer is based on €19.90) after initially falling to €18.57 in the hours immediately after the announcement. Berendsen stated on Friday that there is no further basis for discussion as the bid significantly undervalues the company. We suspect that sounding with shareholders may have taken place.
News flow from AGM updates and March and September year ends flows strongly during the remainder of this week. On Tuesday we have interims from Renew Holdings, finals from Homeserve and Epwin has its AGM. On Wednesday Babcock announces its finals for 16/17, Ibstock and Travis Perkins hold AGMs and Kingfisher is due to make a trading statement. On Thursday G4S has its AGM and on Friday the pace slackens as there are no relevant scheduled announcements.
On Friday last SIG topped the leader board with a 5.0% increase to 139.3p; the shares are now up 35% YTD. Mainstream brokers have consistently under estimated the potential for SIG to strike betters accommodations with manufacturers and improve the value added it creates in the distribution process, which in its case can include a high level of technical; content and therefore value. At the turn of this year we indicated the potential for SIG to possible double this year with the right management appointments and a favourable trading background; that potential still exists.
The backmarkers on Friday were Serco, down 1.3% to 118.7p and Morgan Sindall down 0.6% to 1195.5. The moves were simply adjustments after strong recent runs in both situations. The faller to note was Balfour Beatty which dipped by 0.3% to 278.5p. Its AGM statement failed to get much interest, which is consistent with the company taking a cautious approach to recording its progress.
Moves last week
The sector on average outperformed the market’s 0.4% rise last week but that was due largely to the house builders rising by 2.5%; Services stock were level and Building and Construction fell a tad, affected by fears of a slowing of activity and profit warning concerns.
Berendsen’s 28% rise in the week was for the obvious reason of the proposed offer which has been discussed earlier. The other major riser last week was SIG which may be rising due to fundamentals but the PE background and deal record of the new CEO might be creating some thoughts about how shareholder’s value might be created at SIG, sooner rather than later. Note also that Capita rose by 5.3% last week to 581p; if it really does not need to raise new equity and the new CEO is credible the shares have substantial recovery potential, in our view.
The largest loser last week was Interserve, down 6.6% to 230p. The management really is in a very difficult spot at present with some substantial issues in the operations and the departing CEO in post for another three months waiting for his successor to arrive officially. The business has some substantial problems that cannot be handled until the CEO is in place. In the meantime the uncertainty is affecting the company. It may look very cheap at 230p but there is no strong reason to own it and plenty of time to buy into the recovery, if it is to happen, when more facts are available. In the short term the risks are pretty high.
The situation with Interserve is different from that of Capita as the former does not have contract longevity and strong market positions in the manner of Capita, across a large proportion of revenue or a disposal opportunity that can be used to get the balance sheet in order. The contract situation allows a bit more time to adjust and a smaller requirement to win new work in the short term.
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