Market Commentary - Housing, Infrastructure, Construction and Services 26th May 2017
There is no formal RNS news this morning in the HICS sector. In the absence of news we thought it worth highlighting the recent trend to new money going into housing in new ways. The moves yesterday were in a relatively tight band with Capita falling by 31p to 546p, 5.4% but of that fall 20.6p can be ascribed to the stock going XD with its final dividend payment for 2016. Kier got some support yesterday and was our best performer rising 1.1% to 1246p having been a tad friendless in recent months.
There is no formal RNS news this morning in the HICS sector. In the absence of news we thought it worth highlighting the recent trend to new money going into housing in new ways. The newly floated company The PRS REIT plc begins trading next week having raised £250m to buy newly constructed rental properties. Its focus is on family accommodation in large urban areas outside London. The Homes and Communities Agency (HCA) which is noted more for the support it provides to Housing Associations made a direct investment of £25m into this new vehicle. Aberdeen Asset management is investing in a £100m scheme in Bath to build 244 residential units along with some office accommodation on the five acre former Bath Press site. So cash is going into housing just at the very time the incumbent government’s new manifesto states that net migration (which is falling but was still near 250,000 in 2016) will reduce to tens of thousands. There is a shortage of housing that is clear but if the promises about migration are kept population and economic growth might diminish reducing the housing shortage more swiftly that anticipated. Moreover there is a growing outcry that the skills shortages to build new properties is getting worse despite attempts to push forward with a training and apprenticeships. So some interesting issues ahead, as always nit least in housing funding and the impact the new entrants, including Civitas might have on the Housing Associations in the long term.
The moves yesterday were in a relatively tight band with Capita falling by 31p to 546p, 5.4% but of that fall 20.6p can be ascribed to the stock going XD with its final dividend payment for 2016. The debate still exists regarding whether a fundraising is needed, in the absence of a new CEO and news on disposals. There is also, in our view a question mark surrounding its ability to sustain its operating margins which having been in the low teens for many years were just 11% last year. The current planned disposals involve revenue reduction of near £450m based on recent performances and a reduction in operating profit of £70m, all other things being roughly equal. That will result in a business with annual revenue of around £4.6bn (assuming some growth in other areas) and operating profit of £470m. Taking those numbers and assuming lower interest payments and a 20% tax rate we get EPS of 54-57p which easily justifies the current price, in our view. The key judgement is therefore around the sustainability on 10-11% margins. That is a bigger issue not for a morning commentary!
Kier got some support yesterday and was our best performer rising 1.1% to 1246p having been a tad friendless in recent months. The selling has been a tad harsh but the shares now look to have found a floor and might be ready to bounce back. SIG continue its climb back with a 1.1% rise to 153p, a level not seen since October 2015. The support is justified by the potential ahead in terms of margin improvement and revenue growth; the new top team have been given the thumbs up by the city and the story they are telling about how improvements might be made are at the right level of optimism and credibility.
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