Market Commentary - Housing, Infrastructure, Construction and Services 27th April 2017
It’s a big day for news with AGM related trading updates across the patch including Berendsen, Taylor Wimpey and Persimmon. Q1 trading updates from Howden Joinery, Countrywide and Travis Perkins have added to a busy morning. The trend in the last week has been for there to be far more risers than fallers in the HICS sector and stock prices are creeping upwards. That trend is not wholly consistent with the increased level of uncertainty now faced by UK companies in terms of the home market.
It’s a big day for news with AGM related trading updates across the patch including Berendsen, Taylor Wimpey and Persimmon. Q1 trading updates from Howden Joinery, Countrywide and Travis Perkins have added to a busy morning. The theme in all of the statements is similar in that trading is tough but improving despite, in some cases, high comparators. Only Countrywide bucks the trend as it is faced with a 13% decline in revenue versus last year due to stamp duty changes boosting Q1 last year and a reduction in transactions that is happening, due to current conditions. With most major banks starting to take staff and activities to Euroland cities at present London activity was bound to be lower. Countrywide tell us that the General Election should not alter expected activity in 2017 as whole and transactions will be around 5% lower than last year. The company is upgrading its digital marketing and has a cost transformation programme in place which will aid performance. But it is clear the market for buying and selling hand houses is suffering from a lack of available stock; there is not obvious evidence of a lack of demand at present.
Berendsen’s update tells us that trading in Q1 to end March in line with expectations with underlying revenue at CER up by 3%, reported revenue up by over 10%. The company continues to implement substantial change programmes which it expects will improve margins. CFO Kevin Quinn has indicated he will “retire from the company” in April next year; new CEO’s tend to have their own ideas about who they want as FD so 21 months on from the change at the top this is no shock. The market is expecting EPS of around 58p for the current year and 59p next year; the risk on next year must be upwards as the impact of operational changes begin to take effect. At 824p at close last night a 14x prospective p/e is on the low side compared with past valuations and below peers such as Rentokil and Compass so there should be support today.
Taylor Wimpey gets the General Election impact into its statement quite early, which is realistic as elections tend to slow activity and given we are into the spring selling season the housebuilders did not need the third big poll in three years in England and Wales to disrupt the market, but they have. The good news is that the market in the first four months of the year has been positive and TW tell that they have done very well. The sales rate was 0.93 sales per site per week and reservations are 16% higher than last year and the cancellation rate has dropped to 10% from 11% (below 20% is good). The order book has 9,210 dwellings in it now compared with 8,811 this time last year. The only blot on the landscape is the £130m provision the company is making for selling houses with a leasehold entitlement with onerous increases in rents. The cash impact will be spread over a number of years. The company is seeking to alter terms on the leases it has sold as well as those it retains. This type of lease contract, used from 2007 to 2011 must have seemed like a good idea at the time but not now. The £130m is not onerous in the context of TW and therefore the company statements about trading and the mid and long term prospects and the dividend programme will find support, in our view. It will, however be a long six weeks between now and 8th June.
Persimmon’s update tells us the company has had an excellent performance (does that beat TW’s “very well”!). Forward sales revenue is up 11% at £2.6bn, compared with £1.9bn at end 2016 and visitor levels are up 6% against last year. We are told the sales rate is 12% higher in Q1 than at this time last year but not the actual rate. We expect that it is around 0.8 which is clearly a tad lower than TW’s but it is an improvement and is strong compared with many peers. The capital return plan is intact we are told at the new higher level. The company does not mention the Election as a factor in its thinking though we are sure it will be there, especially in relation to continuing support for the housing sector from government. The company is more exercised over the issue of getting detailed planning permissions which is needs to open 90 new sites this year of which it has opened 67 to date.
Both TW and Persimmon have provided positive updates. It has yet to be seen whether the Election will have an impact on Spring selling activity, the number so far suggests not but no doubt there will be questions on conference calls about any changes in the last week. With new build being the main source of supply of dwellings at present and mortgage rates remaining low the outlook described by the pair seems to pass all tests of reasonableness.
Travis Perkins indicates that it has achieved solid L4L sales growth in Q1 with a 2.7% increase, 4.9% overall. The increase has come from pricing to recover inflation costs rather than volumes. The problems in plumbing and heating are not yet resolved, it will take time and sales in that segment are down 1.1% L4L in the period versus last year. The more significant issue is that sales in general merchanting are down 0.3% L4L (up 3.1% overall) which the company indicates is in line with expectations and it seems more concerned about price inflation recovery than volumes. The highlight was a 12% L4L rise in sales in the contracts division, against a weak comparator in 2016 but as the company points out on a two year view sales are 14.5% up L4L. Travis Perkins states that it will meet expectations for the full year which are for EPS of 113p so the share price at 1607p last night might be seen to be up with events by many people.
We visited the Stewart Milne timber frame factory in Witney yesterday. There are a number of findings that are important but the impact on Merchanting is relevant today, given TP’s news. The impact of more factory production of sub-assemblies and component in new house building going to site via the factory, made with materials bought not through a merchant but direct from the manufacturer, is only starting to play out. There is a strong case to say we are at an inflection point in this regard with substantial investment currently being made in offsite production, especially of wall, floor and roof assemblies.
Howdens tell us the company is performing in line with expectations with revenue up by 3.9% overall and 2.4% on L4L depot basis. The expansion programme continues with 30 new depots expected this year making it 650 in all at present. The company tell us that the market is stable and that it has mitigated some of the impact of FX inspired cost inflation with sales initiatives. But, as might be expected, there is a hint in the release that the company is hoping for the best and preparing for life to get a bit tougher and more uncertain as the Election (not mentioned by the company) approaches.
The trend in the last week has been for there to be far more risers than fallers in the HICS sector and stock prices are creeping upwards. Yesterday Berendsen led the way with a 3.4% rise to 824p as it gradually restores its credibility in the eyes of shareholders. Rentokil fell back after its trading update last week to the 240p level but another 1.7% rise yesterday saw it back at 2499p. That trend is not wholly consistent with the increased level of uncertainty now faced by UK companies in terms of the home market. The main losers yesterday were down just 1.2% (Polypipe) and 0.9% (Grafton) which we expect to be no more than trading flow rather than anything else and a bit of profit taking. We also note that the level of shorts on Carillion has fallen to 21% from 24% based on Castellain Capital data; perhaps the market is starting to believe, as we do, that the Balance Sheet cure process has started.
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.