Market Commentary - Housing, Infrastructure, Construction and Services 26th January 2016
Kier and Countryside have updated this morning and both companies report that they are trading in line with expectations and that demand is at a high level in residential and, in Kier’s case, property as well. The main moves yesterday involved Mears touching 500p, rising 4.1% on the day. We have spoken positively about the company for some time.
Kier and Countryside have updated this morning and both companies report that they are trading in line with expectations and that demand is at a high level in residential and, in Kier’s case, property as well. Recent industry discussions have indicated that outside London the cycle is still in recovery mode and is well short of anything like boom conditions. The next phase is bust of course and we are some way from that. The prolonged nature of the recovery, the likely structural changes that will come with Brexit and the unexpected twists and turns in politics are providing some very confusing signals for investors. There is no simple answer but we expect the housebuilders will produce some very good numbers this year, based on evidence to date. The structural supports to the market, high employment, cheap and available mortgages and government measures to support the industry in both the private sector in affordable housing area seem likely to persist for some time. So in terms of housing at present, there should be little confusion, the market conditions are positive. More below.
The main moves yesterday involved Mears touching 500p, rising 4.1% on the day. We have spoken positively about the company for some time. The combination of very clean accounting, good operational performance and good market conditions as well as the company adapting successfully to market developments has been good news for investors. Note also, SIG, our pick for 2017 rose 1.6% yesterday to 108.5p. The main loser was Compass, was the largest loser, down just 0.7% to 1402p, as sterling rose against the US$. CPG has been under a bit of pressure recently, due to a combination of FX and possibly a bit of profit taking and some nerves about the CEO leaving his NED role at Tesco unexpectedly. Aside from the FX issue the other factors will remain drag on the share price, in our view. The buy backs continue and we have reservations about that as a method of returning cash to investors, exacerbated in the case of CPG by the high valuation of the stock; it is difficult to believe that the board cannot find a better use of cash than to buy back its own shares at 22x earnings.
Kier’s release today is positive and the tone suggests that a beat is more likely than not. Market forecast have been moderated in recent months and 110-112p is the likely outcome, on consensus. The strategic move to invest in residential building land, partnership housing and property, as well as growing the services operations has been direction for several years. The £75m cash received from the sale of Mouchel Consulting has already been recycled into the target activities so period end net debt, end December, was up £4m at £179m and average net debt in the first six months was £179m. The company highlights several contracts in services, points out that it has 100% visibility on revenue in Construction and Services and net debt will be less than 1x EBITDA, so that should not be a concern. At 1344p at close last night Kier should get support today.
Countryside tell us that the first 13 weeks of the year have seen very good trading conditions. Completions are up 23% to 531 units, it now has 11,172 plots with planning permission (up 1,965 units) and in the pipeline in partnership it has 37,410 units. The main data in the update is about the growth in plots which is fair given that we are only three months into the new year. The promise of strong growth with which the company returned to the market is being sustained.
The news today about market conditions is positive for those in partnership housing such as Morgan Sindall and Galliford Try as well as those that have sustained a focus on dwellings with a lower than average ASP such as MJ Gleeson and Persimmon.
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.