Market Commentary - Housing, Infrastructure, Construction and Services - 27th November 2016
Several items of interest this morning among the smaller companies in the HICS area. Lavendon has had a second serious approach the new one coming from Loxam SAS, the quoted international hire operator.Capital and Counties has issued a trading update in which it says that London has been characterisd by greater uncertainty but trading performance has been positive and rental levels reached a new peak. For choice in the Merchants the real recovery potential probably lies with SIG
Several items of interest this morning among the smaller companies in the HICS area. Lavendon has had a second serious approach the new one coming from Loxam SAS, the quoted international hire operator. The announcement, from Loxam indicates that it is considering an offer and is in discussions with Lavendon. Paris based Loxam is a serious player in hire as it has a presence in 13 countries and in 2015 had revenue of €838m of which €654m was in France. The existing bidder, TVH has already acquired 9.0% of Lavendon at 202p versus its bid at 205p. We expect to see more corporate activity in te HICS sector, excluding the mainstream housebuilders.
Capital and Counties has issued a trading update in which it says that London has been characterisd by greater uncertainty but trading performance has been positive and rental levels reached a new peak at £650 as q ft for Hotel Chocolat in Covent Garden. Grainger has announced it has committed to a 194 dwelling PRS scheme in Bristol on which it will get a 7% yield when fully let in 2019. The indication that Grainger will forward fund the project explains one of the main attractions to contractors of PRS, in this case Willmott Dixon.
The conclusion from news this morning is that there is still a “business as usual” in the UK at present. Whether that will alter in the New Year when inflation begins to kick in and the possibility of interest rate rises is more apparent we are unsure. The weekly and YTD data points to caution in services and housebuilders at present, with relative underperformance and the Construction and Materials stocks (ex CRH) have performed in line
News this week is expected from Countryside and Shaftesbury tomorrow with their Prelims and Wolsley may update at it AGM. On Wednesday Telford Homes provides its interims. On Thursday Grainger has its finals and on Friday we will get the interims from Berkeley and the important views of Tony Pidgeley on how he see the housing market. We also have CMD’s this week for Kier on Wednesday and Serco on Thursday which may include updates but we doubt it.
Friday last saw Mears top the table with a 2.9% rise to 476p but 12,874 shares traded is not representative. The company has traded between 450p and 480p for the last few months and there are good reasons for the stock to get support. Perhaps the 2% rise in Berendsen the second best riser is a signal that the bottom has been reached at near 900p, it closed at 890p on Friday. It has seen an overly harsh treatment to a relatively small lowering of guidance for this year and the current level should be a good entry point. But there is, as yet,no rush to buy
Grafton was the weakest performer falling 2.8% to 557p, The shares have bounced back from the low reached after the interims on 31st August but not convincingly. Trading on 13.3x p/e the stock sits between Wolseley on 17.4x and Travis Perkins on 11.5x and SIG on 9.6x. Grafton is probably up with events at present; recovery in Ireland and the Netherlands provides some zip to the prospects by recent sterling strengths versus the € (or just € weakness?) has reduced some of the Euroland attraction.
For choice in the Merchants the real recovery potential probably lies with SIG. The appointment of Mel Ewell on an interim basis is, we suspect, shortlived as distribution sector experience is essential, in our view. That may create a conundrum as the incoming CFO, Nick Maddock, presumably came across from an equivalent position at McStone with sort of “hope” for a CEO role. Stuart Mitchell’s departure was clearly a rushed event, at east to most outsiders. Any uplift from here will be tough for some time but an improved accommodation with suppliers is essential at SIG and is possible, if handled well. The prospects for the Off-site operations are positive and it is expected to be an operation that will yield double digit margins; £150m of additional revenue at 10%+ margins remains possible by 2018 despite the delays on the new plant. And the background of sector consolidation remains a potential attraction to SIG
Moves Last Week
It was a sticky week for the sector with the market up around 1% and the sector down around 0.5%. Perhaps too much had been expected from the Autumn Statement which was quite bland in many ways and repeated several rehearsed themes and promised spending on a scale previously alluded to but rarely delivered.
Atkins decline is steep and in our view reflect some irrational exuberance around the Trump Infrastructure promises. It provided the largest fall last week, down 8.1% to 1444p. The pension deficit is seen by some investors as a blockage and certainly the cash deficit contribution is a drain on potential growth. But that will resolve over time so the key issue remains its attractions as a trading entity and those are very positive. The “investment“ in Acuity is not helpful in the short/mid term. The gap in the market for a new AD Little/AT Kearney/Booz Allen exists but it not clear that it is best filled by an elite set of “super consultants” in Atkins, from an internal or external perspective. With EPS of 1115p=120p de[pending on FX moves Atkins is starting to look good value especially given teh expecte d scale of activity in the US and the UK.
The Merchants (Grafton, SIG, Travis Perkins and Wolseley) seems to have stabilised at lowr levels and now provide some attractions to investors. Having had substantial concerns about SIG for a long period we are now looking at it as a company with good recovery potential. It’s low level of building sector distribution at senior levels has been a drawback, in our view, hence Travis Perkins has given it a hard time at a commercial level in the UK. At 93p and trading at around 35p EV for every 100p of sales SIG’s performance is capable of getting better, swiftly, under the right top team. There is plenty that can be done with a business that has £2.5bn revenue and a relatively solid balance sheet; it just needs much improved accommodation with its suppliers and customers; that is easy to say and hard to do but it is possible.
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