Market Commentary - Housing, Infrastructure, Construction and Services - 23rd November 2016
After a deluge of news yesterday the only item of real interest today is the Brammer board’s recommendation of an offer for the business from private equity at 165p, a 69% premium on the closing price last night. The market showed few signs of mercy yesterday. It may that the newsflow just tipped over a few potential sellers and gave few if any additional arguments for buyers.
After a deluge of news yesterday the only item of real interest today is the Brammer board’s recommendation of an offer for the business from private equity at 165p, a 69% premium on the closing price last night. This follows a slightly clumsy but well intentioned bid for Lavendon announced yesterday, which is rejected by the main shareholder. Arguably both approaches are opportunistic but that does not necessarily make them unacceptable. It depends on prospects and in particular when the Institutions may expect the opportunity to be liquid to be repeated. The prospect of more corporate activity in the sector is high, in our view given the cost of money and the market’s (over)reactions to perceived underperformance.
The market showed few signs of mercy yesterday. It may that the newsflow just tipped over a few potential sellers and gave few if any additional arguments for buyers. Babcock and Compass produced results that were in line with expectations but the stock prices fell by 4.6% and 4.7% respectively. In both cases the post event rationalisation is based on facts that were already known. Babcock’s case the negative impact of the grounding of 14 of its helicopters was factored into forecasts.
At Compass, given what companies elsewhere said about Q3 in the calendar year the fourth quarter of the financial year at Compass, to end September, was always likely to be slow that earlier periods. Compass has had a high rating for some time (>20x prospective p/e) and was possibly priced for perfect news. The rating remains at 20x prospective earnings, assuming 65p of EPS in the current year after 61.1p last year. We should not be surprised to see profit taking continue a little longer and support to appear at 1250p. There was some concern that the operating margin at CPG was stuck at 7.1%; it is easier to construct the case for saying that is near to as good as it gets in FM than supporting the case for 8% to be a realistic target. CEO Richard Cousins has just passed the 10 year mark in the role and perhaps some observers are concerned about change, which is inevitable at some point.
Babcock’s new CEO has a different challenge as following Pete Rogers was always going to be a difficult task. New CEO Archie Bethel is a 63 year old veteran of the engineering sector who has been focussed on Babcock’s main customer the MoD for a long time. With 80p of EPS expected this year and the price at 945p the company can be forgiven if it is frustrated at its valuation of 11.8x prospective p/e. Better transparency on its accounting and an improved attitude towards genuine attempts to understand the business might go a long way to improve the rating. The underlying strong market positions in the UK, especially with the MoD are fantastic strengths and the military are “fair” customers in our experience.
It was also disappointing to see Renew Holdings fall by 6.8% on the maiden outing at a result meeting of the new CEO Paul Scott. Trading was positive at the company and in line and the outlook is very good. But a chance was missed to set new targets given that the existing ones for 2016/17 were in effect reached in 2015/16. The dip to 384p was harsh but the change at the top was announced over six months ago so there has been time to assess the situation and provide new goals. The situation is easily recoverable of course by being more forthright about direction and strategy. More of the same in terms of markets and skills sets is acceptable, given the company’s position but if the direction is clear and known then some sense of the speed is needed. The stock was trading on a prospective p/e of 13x last night which reflects the strong performance to date but our view is that the prospects are bright and the shares are underrated. The sooner the board sets the expected standard of future performance the better.
Mitie was the best performer yesterday rising 5.8% to 201p as the heavy duty purchase of stock by the new CEO impressed investors. We believe that a further write down is likely to make sure that incoming management has a clear track in front of it. But the prospects for the business remain positive and we expect a clearer outline of what Mitie will be in the future in May next year at the 2106/17 results.
John Morgan, like Phil Bentley, recently paid over £3m of shares in the company that employs them. In John Morgan’s case it took his holding in Morgan Sindall back over the 10% level. Last night the company held a get together in the West End so City folk could mingle with its top team; it is an annual event. The message came through loud and strong that the company is in very good shape in trading and in terms of cash performance and it has no pension deficit issues. We suspect there is scope for the company to beat current forecast for this year, which are for EPS of c 77p and raise the guidance for next year. So at 715p the shares are well undervalued
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