Market Commentary - Housing, Infrastructure, Construction and Services - 24th November 2016
HSS Hire has reported its progress in the first nine months of the year today and the small timber merchant James Latham has issued its half year numbers. The headlines from the Autumn Statement are well covered in the press so no real need to cover those in any depth here. The impact of the much higher level of government borrowing in future interest rates is the key concern for the sector. Arguably it is factored into the share prices of the housebuilders but defining the right numbers to make that assessment is not possible.
HSS Hire has reported its progress in the first nine months of the year today and the small timber merchant James Latham has issued its half year numbers. HSS is as expected with revenue up 11% to £256m in the 40 week period and adjusted EBITDA up just 2.3% as the impact of changing the operating structure and now an extended timescale, weighs on costs. The company has said that Q4 earnings will be at the lower end of expectations and that the business will miss the current level of expectations for the full year. As a consequence net debt is likely to remain near to the current £240m at the end of the year. Whoops, the strategy of a debt fuelled dash for growth in a fragmented UK hire market has not worked; the company has pulled back on its ambition, that is very clear but the implementation of what remains is prolonged. The EV at the closing price last night was £390m so the valuation at 5.8x EV/EBITDA is a little stretched, in our view. Speedy Hire with an EV of £320m (of which net debt is just £85m) and similar or better EBITDA this year looks a better situation for financial and commercial reasons as well as based on valuation.
Briefly on James Latham, the company reports revenue up 4.2% at just over £100m which claims is due to only small gains in volume and product mix and guides that passing on higher costs of imported raw material due to the fall in sterling was the main factor. Latham may be small but the read across is valid. The profit data suggests that much of any rise was passed through but of course we cannot tell whether hedging strategies in place mitigated some of the FX effect. Operating profit rose 21% to £7.8m as costs were controlled and bad debts were lower than expected. The company also claims that it took good advantage of cash settlement discounts from suppliers which its net cash position of £16m enables it to do. The rise in the pension deficit from £7.7m to £23.2m is an adverse element with read across value; such calculations are done at a point in time and end September was unhelpful as bond yields were abnormally low. How such deficits are handled needs much further scrutiny. The impact on the P&L and annual top up cash costs are becoming highly onerous and reducing companies’ ability to invest and thereby provide strong covenant. The BHS debacle notwithstanding some better way of managing trustee concern is needed.
The headlines from the Autumn Statement are well covered in the press so no real need to cover those in any depth here. There was some good stuff there for the sector but most of it already in stock prices and perhaps more was expected. £3.7bn for more housing support is helpful but not transforming. The £2.3bn Housing Infrastructure Fund for 100,000 new dwelling is £23,000 per unit, which could be a lot or a little depending upon what it includes. It’s more than a housebuilder normally spend per unit. Increasing the % of GDP allocated by government to infrastructure to up to 1.2% from 0.8% and the £23bn National Productivity Investment Fund has some promise for the sector and extending the guarantee scheme to 2026 for private infrastructure investment, doubling the Export Finance capacity will aid contractors working overseas such as Carillion. The £1.1bn of extra spend on local transport networks could be good for Kier and Balfours but is not a game changer. The letter to Lord Adonis on the use of news technology in Infrastructure may be a typical politician’s statement. But it provides a mandate to the New National Infrastructure Commission to look more closely at technology, which is good news, especially for Atkins and Costain.
The impact of the much higher level of government borrowing in future interest rates is the key concern for the sector. Arguably it is factored into the share prices of the housebuilders but defining the right numbers to make that assessment is not possible. What is also clear is that failure to act on changing Stamp Duty can only make life tougher for the second hand housing market, as shown today with Countrywide’s update which indicates that exchanges were down 29% in London in Q3 versus last year. The health of the second hand market is important for new build, of course and the ripple effect from London has always been a key influence with a lagged impact on the rest of the country.
The sector moves yesterday were relatively small and broadly within the ebb and flow of trading. Compass was the best riser, up by 2.2%, recovering half of Tuesday’s decline and closed at 1355p. The post results selling was an over reaction but there remain some concerns at Compass that might cap further gains. Grafton drifted down further to 571p, the largest percentage faller at 2.7%. More significantly perhaps was Berendsen’s dip to 879p, down 2.4% and at its lowest level since August 2013. The shares are now down 30% following the end October trading update which flagged a few small issues that do not alone have justify the valuation dropping from 18x to 13x prospective p/e. It looks as though changes in the top team have not quite inspired shareholders as much as was hoped, as yet.
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.