Market Commentary - Housing, Infrastructure, Construction and Services 24th April 2017
Bovis, Interserve, Civitas and Mortice have all released small items of news today that are relevant to them and have read across. The sector performed relatively well last week, down just 1.0% against the market down by 2.6%. The strength of Sterling versus the US $ caused some changes in views on earning which were purely technical, FX related, rather than a comment on business performance.
Bovis, Interserve, Civitas and Mortice have all released small items of news today that are relevant to them and have read across. At Bovis Greg Fitzgerald has spent £1.2m on second hand Bovis shares at 925p each as he starts his new role as CEO. Not quite the amounts spent by Phil Bentley and John Morgan in recent months (>£3m in their cases) but it is a strong statement of intent that will be heeded. It’s not a massive amount of cash but it is meaningful enough to make the statement Greg should wish to do at this stage. Interserve has announced a small contract worth £36.5m to design and build a new school in South Wales. Civitas floated six months ago raising £350m of equity to buy social housing assets and has really struggled to find stock on acceptable terms. Today’s announcement that it has spent £3.5m on the three properties with 13 tenancies with a net yield of 6% is typical of what it has been able to achieve so far. Institutions can invest directly in property and in social housing projects so the role played by Civitas in the process, which is purely about tfhe property and not the services, is debatable. Civitas remains unleveraged so the returns to date at around 6% on purchases are likely to be some way short of the cost of capital. Whether Civitas will eventually find stock remains to be seen but at present it is sitting on at least £300m of the funds raised and earning sub-optimal returns on investments. Investors might have expected a more mature investment execution plan on coming to market. Mortice, a small FM and security operation, is quietly implementing its plans and has paid up to £4.5m to buy Elite Cleaning and Environmental Services with a mix of £1.8m net cash, £1.5m new Mortice shares and a £1.0m earnout.
The week ahead is relatively quiet as we enter the AGM trading update season and the reporting of the March and September year ends. It all happens on Thursday when Countrywide, LSL Property Services, Berendsen, Persimmon and Taylor Wimpey have their AGMs and we suspect that they will say something about trading YTD. Travis Perkins has a trading update scheduled, its AGM is not until 24th May and Howdens Joinery will also update on trading ahead of its AGM on 2nd May. We are expecting some positive statement from the housebuilders, merchants and materials producers regarding trading YTD all slightly tempered by a comment of caution regarding Brexit and the Election. Rightmove indicate today that asking prices for houses are still rising, up 1.1% in April; albeit slowly but that buyer affordability is stretched.
Atkins was the best performer on Friday last with a 5.4% rise to 2101p as the price responded to the recommendation of the Atkins board to the 2080p bid for the business. The bid is recommended and is unlikely to be topped by a rival bidder, in our view. At £2.1bn the consideration for £174m of EBITDA in 15/16 (as reported) and around £190m for this year (11x propective), is a full price in our view, especially when buyers must take into account the recent deal with pension trustees to pay c £35m a year to help to clear the pension deficit through to 2025. Nothing can be ruled out of course especially if another party believes it can create greater synergies than SNC-Lavalin believes it can deliver. Atkins is a unique asset, in our view so there may be a new bidder especially if they can unlock the issue of the pension deficit contribution, which we believe should be possible.
Mitie was the back marker, down 1.5% to 210p. We do not read much into that move in itself, but remember it has it results soon, end May and they will include whatever is needed to kitchen sink the financial reporting history and make a fresh start. We expect that most adjustments will be non-cash and the rebasing will do a bit more than the indications to-date. As we have said all along, it’s not a bad business just not as good as the numbers were showing in the reported headlines; the accounts showed enough to make investors wary but the way in which some accounting rules were interpreted were well outside the norm.
Moves last week
The sector performed relatively well last week, down just 1.0% against the market down by 2.6%. The strength of Sterling versus the US $ caused some changes in views on earning which were purely technical, FX related, rather than a comment on business performance. YTD the sector is up versus the market with the housebuilders near 12% higher and services 7% up, while the market is down (FTSE100) 2.9% and 2.6% (FTSE350). The relatively benign conditions for company earnings and in the markets are unusual and with ratings where they are the risks are down not up it might be thought. But there is a momentum at present that has few obvious catalysts for change.
The moves last week were small and not really indicative of any change of view. The stocks took the election announcement in their stride really and seem impervious at present as earnings forecast are not undermined at present that seems logical enough. A bit of M&A chatter helps of course and with some real approaches being made it is not idle!
Atkins was the best riser last week, up 5.4% to 2101p for reasons already discussed. We note also the rises in Berendsen, where reputation is slowly being regained, up 2.7% to 781p and at Polypipe, which rose 3.5% to 406p. In the case of PLP the rise follows a positive report on 2016 and the recognition of good prospects for 2017 and beyond; FX moves have also been helpful. The back marker was Rentokil which had a positive Q1 trading update last week but FX moves probably reduced some of the impact of that. Other stocks with meaningful US earnings also took a small hit (e.g. Balfours, Serco, Compass) but there was nothing substantial enough to alter views on underlying trading.
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