Market Commentary - Housing, Infrastructure, Construction and Services 23rd March 2017
Kier’s half year numbers are the main headline today, Crest Nicholson has issued an AGM update and WYG has also updated. Kier has announced a bit more than good numbers as in other announcements it also states that it will soon have a new Chairman and it has created a JV with east of England based Cross Keys Housing into which it will transfer some land and developments worth £97m in exchange for £64m cash now and 90% economic ownership of the JV (50:50 split of voting rights).
Kier’s half year numbers are the main headline today, Crest Nicholson has issued an AGM update and WYG has also updated. Kier has announced a bit more than good numbers as in other announcements it also states that it will soon have a new Chairman and it has created a JV with east of England based Cross Keys Housing into which it will transfer some land and developments worth £97m in exchange for £64m cash now and 90% economic ownership of the JV (50:50 split of voting rights). Kier tell us the JV will be earnings accretive in 2019 (slightly negative until then) and cash generative from the outset, completion is due at the end of this month. The group trading numbers are said by the company to be in line with expectations showing underlying revenue broadly level at £2bn and underlying operating profit up 4% at £57m. EPS at the halfway stage are up 11% at 38.9p which is in line with the 10% CACR promised to 2020 but the guidance is that this full year may be a little below the target five year average. More Below
Crest Nicholson reports that trading has been robust, a term usually associated with being mainly good but not as good as it was. The numbers bear that out with open market forward sales level at £312m versus last year and total forward sales up just 5% at £506m. Sales price inflation is said to be modest but that is helping affordability and high employment and good mortgage availability are aiding market conditions. The main message is that the company is continuing to expand its operations and is on track for 4,000 units in 2019 and £1.4bn of revenue. So all is cool at Crest but the economic backdrop for jobs and cheap mortgages is getting a little worse than it was so much depends on how the economy reacts to Brexit, especially in the South east which is most affected by financial sector jobs.
WYG’s share price took a post Referendum bashing from which it recovered about six weeks ago. Today’s news might send it back down again a little as the company has warned that it needs to restructure in Poland and there will be a cost of £2.5m and that, more importantly, UKL profits will be impacted by delays and lower than expected utilisation. The company points to operating profit of £9m this year and revenue in excess of £150m; the revenue is in line with expectation and up 13% but the 25% rise in operating profit and a few £m short of expectations. The international operations show improved underlying revenue and earnings, as expected. We have followed the stock from a short distance and believe the management when it says this is a blip in strong progress rather than a substantial issue. It looks as though in the UK at least it has just tried to go faster than it should, with hindsight! Net debt will be £6m at the year-end so the balance sheet presents few problems on that issue. So forecasts for EPS are likely to fall to the 11p level (compared with 12.3p currently forecast by the market) which makes the closing price last night at 128p a tad vulnerable in early trading today.
For the second day running our screen had far more red than blue as stock prices dipped. Only two risers among our universe of 22 closely watched stocks, Mears, up 0.3% and SIG up 0.1%. The volume on Mears at 577,211 shares traded was well above the norm levels and is therefore a tad more representative than the normal position. The stock closed at 502p. 2017 forecasts were trimmed a little after the results on Tuesday due only to a £2.5m non-cash pension service charge which the company treated as part of normal costs; Mears does not indulge in practices such as capitalising bid and mobilisation costs. In 2017 the market now expects EPS of 35-36p with the risk on the upside as higher margin work in housing increases. Berendsen was the back marker as it struggles for support, falling 3.9% to 781p; there are reports of target prices as low as 700p which is harsh but after two profit warnings and with the corporate improvement programmes still unproven investors do not yet have faith in the top team changes.
Kier is trading as expected according to the numbers released today, from what we can see. There are few ups and downs within the numbers that are of little impact on the overall piece. The small improvement in the margin in Construction to 2.0% from 1.9% is encouraging and the highways operations, focussed mainly on maintenance are seeing a strong level of demand. The housing operations as might be expected have performed well in the private sales business and in mixed tenure revenue was up 10% and this remains an area with strong prospects. We shall dash to the analysts meeting now and report later as appropriate. The business is on track for £150m of PBT for the year and with debt controlled at £179m at the half year (c £150-160m for full year) it looks well set to fulfil expectations.
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