Market Commentary - Housing, Infrastructure, Construction and Services 26th October 2016
There is no directly relevant news this morning. There are however two items that are of interest. Firstly, Bunzl in its Q3 trading update tell us that the recent weakening of sterling has had a significant positive impact on its Q3 reported results. The other item of note is that Lloyds Bank in its Q3 update seems to have cooled its enthusiasm for mortgage lending
There is no directly relevant news this morning. There are however two items that are of interest.
Firstly, Bunzl in its Q3 trading update tell us that the recent weakening of sterling has had a significant positive impact on its Q3 reported results. But the company does not tell us what that impact might be so outsiders are left to guess. It would be helpful if companies could provide some indication as lower sterling is likely to be a mid term feature and while calculating the impact of FX of reported numbers is a simple exercise for outsiders the outcomes may be highly variable if left to analysts. The issue of relevance to many sector companies.
The other item of note is that Lloyds Bank in its Q3 update seems to have cooled its enthusiasm for mortgage lending. It talks of its commitment to helping first time buyers quite positively but in two places refers to the need to balance margin and volume in mortgage lending. In the company’s words “This was offset by a reduction in mortgage balances as a result of the Group’s decision to protect margins rather than focusing on market share in a low growth market…..”. Mortgage cost and availability has been a key feature of the market for several years and is often referenced in housebuilders’ statements. Lloyds share of the mortgage market hovers around 20% and is the largest lender so the indication should not be ignored when assessing the housebuilders. One lender alone will not make a difference but when it’s the No1 in the market its influence should not be dismissed easily. (Nationwide and Santander are usually 2nd and 3rd in teh table with shares of around 13% each)
The news about the Heathrow runway approval failed to help the sector and why should it as shovels will not be needed in any quantity until 2021 at the earliest. Mitie was the biggest riser up 1.4% to 208p; a bounce back was always likely from its low of 180p as its contract longevity and relatively sound operations suggested the business was far from a basket case. It was just not as good as the financial data suggested. EPS was a key driver of management rewards. Phil Bentley, the new CEO starts on 13th December but we have to guess he is doing homework now. It is likely to be at the results for 16/17 in May next year that we get the full version of the way he sees the business.
The main feature of moves yesterday was the weak performance of construction related stocks. Travis Perkins was the largest loser, down a further 3.2% to 1347p as it fails to get solid traction in share price terms. The news from Carpetright may not have helped sentiment, especially as TPK’s consumer operations were among the best performers YTD. Interserve, Galliford Try and Balfour Beatty all fell by more than 2% as support for the sector waned a little and the action was elsewhere in terms of sector rotation. The positive arguments for all three of these stocks are different but nevertheless quite strong at current levels and in the current climate Balfour Beatty stands out as the best mixture of risk and reward in the mid term, in our view.
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