Market Commentary - Housing, Infrastructure, Construction and Services 25th January 2017
Renew Holdings and McCarthy and Stone have issued news this morning, both have provided updates to coincide with their AGMs. Both companies tell us that trading is in line with expectations so there is not much we can add. The main news yesterday was that companies were there are debt and/or pension and/or accounting concerns were the main losers (Capita -3.3%, Interserve -3.1%, Carillion -3.0, Mitie -2.4%, Babcock -2.0, Atkins -1.7%). It would be unlikely that the moves in this way are random.
Renew Holdings and McCarthy and Stone have issued news this morning, both have provided updates to coincide with their AGMs. Both companies tell us that trading is in line with expectations so there is not much we can add. Mc Stone is probably the more interesting one as there is read across to the housing market. The Referendum hiatus affected the company perhaps a little more than the mainstream new housebuilders because its customers, Last Movers are fully dependent on conditions in the second hand market. The data shown mentioned today about the value of the order book (5% higher than last year in value terms) and new enquiries, sales leads and visitor numbers all being ahead of last year suggest that it segments conditions are favourable. That may be intuitively hard to understand given the uncertainties ahead but is not out of line with the housebuilders observations. Renew, as ever, gets on with its business and in a short statement today tells us that trading is in good shape. The shares traded at around 30p 15 year as ago and at 38p in early 2010 so the development has been substantial, in a sector where many stocks have had a fair number of “issues”, and closed last night at 428p. The statement that it will have net cash by the year end in September may be an influence on that valuation as the next observation below implies. More below.
The main news yesterday was that companies were there are debt and/or pension and/or accounting concerns were the main losers (Capita -3.3%, Interserve -3.1%, Carillion -3.0, Mitie -2.4%, Babcock -2.0, Atkins -1.7%). It would be unlikely that the moves in this way are random. Why it should happen to all of these companies on the same day is clearly a key question and we do not have an easy explanation. It may be that valuation screen has come up with an action on these stocks that it shows as obvious and it may include more factors than those we highlight. If there are answers to some of the concerns we shall know within the next few months as years ends are either entered or reported in all six cases. All six companies above are in segments that can be highly cash generative so redemption is possible.
There were few stocks that gained in the sector yesterday as the market showed no change despite BT’s 20% decline. Polypipe was the best riser, up 1.3% to 342p as it restores its valuation. It has taken a while for investors to appreciate that is not affected by the woes the Merchants are facing in UK plumbing and heating markets. Indeed its expansion into new higher added value products has provided a much better growth platform than existed at the time of the float.
Renew’s story is unique in a sector that has been strewn with casualties of one form or another. The main factor in its success has been in managing risk, we suspect. That means not just on a project basis but also through choosing segments of the market in which to operate that have relatively high added value and selling services it knows it can deliver. There have been a few good acquisitions along the way, Amco being the highlight in our view. And usually the deals have been done on a fixed repayment schedule that may sound old fashioned but has worked well as, among other things, it provides a clear discipline. Its operations in energy, environmental and infrastructure provide essential services that need to happen so by selling in a low key but effective way it has made considerable progress. The EPS for this year to September 2017 is expected to be 32p and 34p is pencilled in for 2018 but usually the company has been ahead of expectations. The shares are not cheap but the delivery of earnings has been consistent, not without some issues but by taking few risks and having no accounting concerns, Renew has attracted a strong following.
Looking at Renew the key point has to be that the concerns we have seen at some companies in the sector have probably not been due to the market, to Brexit or any other external factor. Management assessing risk badly and trying to grow too fast in the wrong way and at the wrong time may be important issues. And the “system” often fails to incentivise highlighting those situations early enough.
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