Market Commentary - Housing, Infrastructure, Construction and Services - 25th November 2016
There is no directly relevant news today but updates from Pennon and Thames Water provide some data with both pointing to continued high levels of investment, as per the current AMP6 schedule. Mitie was again a leader yesterday, up 3.3% to 208p on 2.6m shares traded
There is no directly relevant news today but updates from Pennon and Thames Water provide some data with both pointing to continued high levels of investment, as per the current AMP6 schedule. Pennon’s South West Water subsidiary had capital expenditure of £80m in 16/17 compared with £58m in the prior year; one of the main projects is the Mayflower Water treatment works worth £60m which involves Balfour Beatty as the main contractor and Interserve. Thames had a slightly lower capital spend in the six month to end September 2016 than in the prior year at £540m versus £562m for reasons that are not explained but are possibly related to the £4bn Tideway tunnel (which increased operating spend in the period by £7m) projects. The spend was maintained at a high level.
Pennon also mentioned its Glasgow waste to energy project (it owns waste operator Viridor) which has caused much grief for the former project contractor Interserve; the company state that commissioning has started and that its own team will complete the job. The only clue for Interserve watchers is that Pennon mention the delayed handover which may involve penalties; but there is no clues regarding whether Interserve’s £70m provision is the right number
Mitie was again a leader yesterday, up 3.3% to 208p on 2.6m shares traded. The strength of the stock puzzles us a tad because we are not alone in thinking that some more accounting adjustments may be needed. Undoubtedly Phil Bentley knew of the possibility when he spent £3.6m earlier this week on MTO shares at 194p; investors have taken their lead. Looking through the numbers the potential w/off is unlikely to be so large as to require an equity issue. However, any incoming CEO will need to make some room for manoeuvre so it is likely to be 2018 before EPS of 20p is possible. Also note that Mears was strong yesterday, rising 2.9% to 465p. That level is justified by the growth prospects.
The sell off at Atkins continued yesterday despite the likely boost it will get from additional UK Infrastructure spend promised in the Autumn Statement. The 1.7% fall yesterday to 1454p means the fall since the results were announced on 17th November is 13%. The price may have got ahead of events post the Trump victory but the fall since then is now looking a tad overdone. The much increased pension deficit, up to £336m from £216m was exaggerated by the timing of the calculation, done at a point when bond yields were at recent lows. The deficit is a concern for some investors. While the end September rate was an exaggerated level the gap between liabilities and assets is wide and more importantly the deficit contribution at £33m pa and rising at 2.5% for the next eight years is removing valuable resources that could be used for growth. With EPS of around 118p expected this year the valuation seems to us to be too low at 1454p
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.