Market Commentary - Housing, Infrastructure, Construction and Services 27th October 2016
Berendsen issued its trading update this morning for the period from 1st July to end September.Wolsleley and Galliford Try go XD today with final dividend s for 15/16 of 66.7p and 56p respectively. The moves down yesterday were a little more convincing than the up ones.
Berendsen issued its trading update this morning for the period from 1st July to end September. The company now expects a small earnings miss for the year due to operational issues, some of which were already flagged and some not. Adjusted operating profit will be around £160m compared with £153.8m last year; that implies a slight improvement in 2H operating profit of around £2m, this year versus last but the text of the statement is not clear regarding whether the numbers are at CER or AER. The conference call at 8am should clear things up. The company showed revenue growth of 2.4% before FX and acquisitions, which is slightly slower than the 3% achieved in the first half of the year. Reported revenue rose by 12.9% in the three month period which, given currency tailwinds and 7% as the marker from the first half was good but not great. It will be helpful to know the contribution from FX and acquisitions, indentified separately. This is a slight trading blip based on specific issues that had an impact on costs and changes nothing with regard the strategy and direction of the business. More below
Wolsleley and Galliford Try go XD today with final dividend s for 15/16 of 66.7p and 56p respectively.
The moves down yesterday were a little more convincing than the up ones. Grafton (+0.9%), Serco (0.4%) and Carillion (+0.3%) were the only risers while Interserve fell 3.4% and Balfour Beatty 1.5%. There was no real pattern we could discern from the data other than a general lack of buying in the sector and in the market as a whole. The news today from Berendsen will not aid sentiment, as it has been a very reliable performer but clearly the guidance to the market did not include enough contingency for the issues it has faced this year. Many sector companies will be going through the final “wrap up” for this year and budget process for next at present. We are not expecting too many issues to emerge but the sense we get is that there will be little encouragement to raise earnings forecast for next year from management teams and perhaps some will build in a little more contingency. It could be argued that we are talking ourselves into a negative phase but at present there are no prizes for being overly bullish. A rough rule of thumb in recent months is that for every 1% fall in expected earnings versus consensus the share price has fallen by 2% or more.
Back to Berendsen, which emphasises today that the mid/long term position is secure and the Excellence Strategy, implemented by new CEO James Drummond will address the operational issues encountered YTD and generate further improvement. The problem for investors is that much of the gains in operational terms have already been made in the recovery phase and teh markets themselves are inherently low growth. Following Peter Ventress was always going to be very difficult, especially with a focus on operations. It may be that the strategy outlined late last year, based on low risk operational improvements and enhancements to products and services mainly in existing markets need to be accelerated. But it is early days for the new top team and the organisational capability review that is underway needs to run its course, especially in the UK were the main short term issues seem to have occurred. The market was expecting EPS of 65p for the year without much help from FX; the news today will cause forecasts to be trimmed a little we think but the market will need a bit more help to disentangle the impacts from underlying performance, FX and acquisition changes before reaching firm conclusions. The surprise is not so much that the company has had a blip but that the guidance was not robust enough to handle it; conversely it is best investors get the numbers as they are, than the company massages them slightly this year to get the right number only to pay the price later. At 1231p at close last night Berendsen was not priced for an adverse shock.
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