Market Commentary - Housing, Infrastructure, Construction and Services 24th February 2017
St Gobain released its 2016 results last night and provides the best guide to UK HICS stocks this morning. Aside from Morgan Sindall’s 8.6% increase yesterday most moves were in a tight range. MGNS has been indicating for some time that it enjoyed a very good 2016 and more importantly provided indications that there was much good revenue and margin growth to come. Closing at 982p last night the shares are 30% YTD.
St Gobain released its 2016 results last night and provides the best guide to UK HICS stocks this morning. Its most obvious presence in the UK arises from its ownership of Merchants, Jewsons. The phrase many will latch on to is “The UK has not shown signs of weakness since the Brexit vote and continued to advance in line with the first half”. That is the short term outcome so far and one that is consistent with all of the read across. Elsewhere St Gobain reports a mixture of outcomes that contributed to the overall 2.6% revenue growth last year, at CER and the 7.4% rise in EBITDA. A swift round up of the geographic performance shows France stabilising with sales down just 0.1%, W Europe starting to grow with 3.6% L4L sales growth and N America showing sluggish development with 2% sales growth L4L, with the second half being weaker than the first. The company provides only mild encouragement for its prospects in 2017 and points to a bias towards investing more new capital in emerging countries and N America, rather than W Europe. The dividend is raised by just 1.6% for last year and that probably tells the story better than anything else; the mind set is still one of cost reduction and austerity which needs to be recognised. The world is still adjusting to the post Lehman era.
Aside from Morgan Sindall’s 8.6% increase yesterday most moves were in a tight range. MGNS has been indicating for some time that it enjoyed a very good 2016 and more importantly provided indications that there was much good revenue and margin growth to come. Closing at 982p last night the shares are 30% YTD. We guess it took the numbers to be released for investors to believe that the guidance was real! The point of research is surely to provide ammunition so that there are no shocks and we hope we did that. Looking at the likely out-turn for 2017 at MGNS, which is for EPS of 95-100p it’s possible to argue the shares are up with events, it is a contractor after all. However, we are inclined to be more positive as the company has a strong cash position (average daily cash was £25m last year end was £209m) and no pension deficit. It is now of a size and scale to compete for the largest projects in the UK and has won some of them is the market leader in Fit-Out and has substantial growth prospects in Partnership housing. For many investors the shares are still a buy and target prices are trending to the 1200p- 1500p area.
The other moves yesterday saw Serco retreat a further 1.7% to 116.6p, the largest decline on the day. The dip in the share price is not a concern at this stage, we believe. It is still well ahead of the 101p at which the last equity funding was placed. The only thing that has altered in the last few days is that the company has signalled that 2018 might see slow margin growth. Performance in that year depends on progress with its bids for large projects; if it wins several of them, depending on timing, it may have mobilisation costs. It’s possible to argue that the longer term prospects are better now than they were as at least now it sees large scale work it might win and more potential on the horizon; the order book and pipeline are bigger now than they were a few months ago. Buying the stock at 150p was always a large risk as management has consistently indicated that the recovery will be at a variable pace. What we believe is that the company will show even stronger signs of good growth by the second half of this year and is should by then be in position to say something about when dividends will resume. That is the signal the market wants to hear.
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