Market Commentary - Housing, Infrastructure, Construction and Services 28th February 2017
Taylor Wimpey and Interserve have released their 2016 results today. The contrast between them is substantial. Interserve and Carillion were the best performers yesterday with rises of 3.8% and 2.9% respectively.
Taylor Wimpey and Interserve have released their 2016 results today. The contrast between them is substantial. Taylor Wimpey reports as expected with strong demand, last year and for the next six months, improved margins and high levels of cash. Sales volume rose by 5% last year with 13,808 units sold and the ASP rose by 13% on private completions and 11% overall; revenue was up by 17% to £3.7bn and operating profit by 20% to £764m. The company ended the year with an order book of near £2bn, a land bank up by 1% to 76,234 units and net cash of £365m. The company sees continued strong demand for its product, the potential for price improvement in 2017, low levels of build cost increase (3-4%) and therefore continued progress. The ordinary dividend for the full year at 4.6p a share is confirmed as is the special one at 9.2p. We remain puzzled regarding why the company ties the ordinary dividend to the NAV as that measure is increasingly les relevant to the business but, hey ho, it has delivered what it said it would do and a bit more.
Interserve’s numbers show that aside from Energy from Waste (EfW) the business performed reasonably well in 2016, in line with expectations, thought earnings, even on an adjusted basis were below those of 2015. Excluding the bad stuff in EfW Interserve reports 63.3p of EPS for 2016 based mainly on adjusted operating profit falling £21m to £124m last year; revenue was roughly unchanged at £3.2bn. But we cannot ignore EfW given both the uncertainty it creates regarding future obligations and the impact on average net debt which in 2017 is expected to be £450m. The company has passed on the final dividend for the year leaving investors with just the 8.1p paid at the halfway stage; the dividend last year was 24.3p. To make matters slightly worse for investors the company now has a pension deficit of £52m compared with a surplus of £17m at end 2015. More below
Babcock also provided news today with an update for the period from October 1st. The statement is presumably made now as the share price is languishing and it’s near enough to the year end (31st March) to say something and it is holding a City get together on 14th March to show the new reporting structure. The statement indicates that trading is in line with expectations and includes data on several new contracts it has won recently and the news that the order book is maintained at £30.8bn. Most of the work won is in the mainstream nuclear and defence segments of the business with just a small nod to the Avincis operations provided by mention of a new helicopter contract in SW France. The shares closed at 885p last night and with 80p of EPS expected this year the valuation is a tad harsh but the lack of any mention of margins and net debt progress tells us that the company is more focussed on the top line as it is missing some data that concerns investors.
Interserve and Carillion were the best performers yesterday with rises of 3.8% and 2.9% respectively. The numbers today from Interserve show that its venture into EfW has been very expensive for investors; that is not new news so it’s surprising there were strong buyers. Carillion reports its 2016 out-turn tomorrow. Both stocks are a puzzle for investors as they are optically very cheap but both have a substantial financial burden that might turn very sour at some point. Interserve of course is not as cheap as it was given the suspension of the final dividend. Capita, which reports on Thursday was the backmarker, down 1.6% to 548p; that move is small in the context of the news flow that will emerge that might cause the price to swing quite significantly. 548p is probably the wrong price for Capita but it’s probably too high for an equity fund raise and far too low if it can lift itself by its bootstraps. In either outcome it will need to show a more coherent picture of change than it has to date.
Interserve remains in transition with a new CEO due soon; the company say the process of finding the successor to Adrian Ringrose is well advanced. The decision to stop the final dividend might be greeted with some relief rather than disappointment but we suspect the shares will dip again today. The news from the mainstream operations contains few surprises and the company stresses that these are trading well. Albeit with the usual caveat that there are challenges. Cash flow was exceptionally strong at £240m as the FD put the squeeze on the operations to get cash in to fund obligations in EfW. UK construction was said to be disappointing but that is not new news. Mounting a strong buy case for IRV is tough until the new CEO is in place and there is more certainty around the final cost of EfW. There is still uncertainty around the ability of the group to survive, in our view.
TW sets the challenge for investors as to whether it is still a good time to buy the housebuilders. The statement from the company today stresses that management’s goal is to manage the operations across the cycle and take advantage of opportunities as they arise. The latter point is slightly odd as we had seen the company sticking to what it does best and the statement gives slight clue it might do something a little different. With 18p of EPS last year and up to 20p possible this year the shares look good value at 178p. It really depends on where you believe we are in the cycle. But with housebuilders becoming more like a top end consumer staple. The most durable of durable goods, TW may have redefined the investment proposition in a way that investors have not yet quite understood.
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