Market Commentary - Housing, Infrastructure, Construction and Services - 29th November 2016
Vp, LSL, Shaftesbury and Countryside provide news this morning. The themes are the same which are that trading is going well, better than last year and there are few tangible signs yet of slowdown caused by Brexit or any other factors. And yet sector share prices do not seem to correspond to that view which we discuss below. The moves yesterday show the market is getting lukewarm on the sector despite the flow of news that for many seems unexpectedly good.Our sense is that there are some stocks that present good value in the sector and as has been seen investors can take advantage of some of the wobbles that occur.
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Market Commentary - Housing, Infrastructure, Construction and Services
Tuesday, 29 November 2016
Vp, LSL, Shaftesbury and Countryside provide news this morning. The themes are the same which are that trading is going well, better than last year and there are few tangible signs yet of slowdown caused by Brexit or any other factors. And yet sector share prices do not seem to correspond to that view which we discuss below.
Vp’s half year numbers to end September show revenue up 16% in the period and PBT up 9%; trading YTD has been strong enough for the company to flag that it will beat current market expectation in 16/17. LSL is probably the most cautious of the four with news today telling us that YTD for the ten months to end October revenue rose 3% it is down 3% in the last four months of the period; lower revenue from residential sales were partly offset from lettings and financial services revenues. LSL tell us that earnings will be in line with expectations. Shaftesbury’s full year results to end September tell us it has “strong occupier demand across all locations and for all uses”; capital values grew 4% last year and adjusted earning were up 8%. Countryside’s full year numbers to end September show completions up 12% to 2,657 units and ASP in the private area up 21% both of which combined with other factors top create a 26% rise in total revenue and a 34% rise in operating profit. Countryside tell us that current trading is robust and that sales rate sand values are above the year end levels. More below
The moves yesterday show the market is getting lukewarm on the sector despite the flow of news that for many seems unexpectedly good. Only two stocks managed to get into positive territory, Homeserve and Compass up by 0.8% and 0.3% respectively. Admittedly the downwards moves were also quite constrained, though larger, with Grafton the biggest loser down 2.8% to 541p on 696,505 shares traded. At present the sector is low on priority lists. The market’s interest level probably moves betray a view that,
• We are due a slow drift downwards in activity in private housing, RMI and commercial and industrial. The evidence so far does not support much slow down but with rising inflation the market is taking a view. Housing volumes may rise but prices could fall thereby reducing margins at a time when cots improvement is difficult to achieve
• The Merchants woes, a combination of sluggish demand and, arguably, over aggressive behaviour by one of the leaders has caused the sector to fall quite sharply with no noticeable evidence of recovery save through potential cost saving efforts.
• There has been unplanned management change in several companies which does not help sentiment or provide evidence of stability. The recent lack of M&A activity has reduced the pool of “ready made” CEOs eager to take anew challenge, in which sense Mitie shareholders were fortunate. And even where change was planned, such as Babcock, there is nervousness shown through in the share price.
• There is residual distrust of the accounting numbers which will take some time to resolve. G4S and Serco have been through their moments on this issue and are through the other side. Capita and Mitie may need to fess up soon and Babcock is wobbling probably aided by its strong market position with MoD. Argubaly Mitie has laid bare some issues but there is a view that a few more write offs are due
• Infrastructure stocks are remaining positive though the expected spend as always has yet to be shown.
We could add more factors but the picture is sufficiently clear that there is a tug between the obvious issues in the economy and yet we have very well run operations such as Vp announcing a 28% rise in fleet investment in the reported period. The market is celebrating good news were it sees it, principally in recovery stocks such as Speedy and valuations remain good but not as positive as they were six months ago.
Our sense is that there are some stocks that present good value in the sector and as has been seen investors can take advantage of some of the wobbles that occur. It may be that the trading situation in the next two years will not deteriorate by as much as the recent falls in some stocks prices suggest. We are positive on several trading situations that seem to present undervaluation such as Balfour Beatty, Forterra and Costain and stocks which may be subject to individual or industry restructure such SIG and Speedy. Carillion remains a conundrum as its trading appears to be solid but the balance sheet is in need of repair; the new FD has no silver bullet but we suspect will give the matter full attention.
Countryside’s reintroduction to the quoted markets has been positive and the share price moves have been more stable than its larger housebuilding rivals. Its split between private sales and partnership homes is closer to that of Kier and Galliford Try than the other major housebuilders with 30% private and 70% partnership. The mainstream housebuilders are nearer 70/30 the other way. In the partnership operation the company has 6,623 plots now compared with 2,957 a year ago and a pipeline of 33,515 plots. Clearly the margin on Partnership Homes is lower than on private sales but the 71% ROCE and the ability to unlock private sale plots by working with Partnership home providers seem to provide good evidence of shareholder value being created.
On all key performance measure looked at by investors countryside ticks the boxes. Net cash stands at £12m. The landbanks were increased in the last twelve months by 5% in the private segment to 19,322 units (which is a crazy 25 years at current output) of which 90% was from strategic (ie cheap) sources and in partnership the increase was 35% to 14,504 plots (7.7 years at current rates of build). So the scene is set, market permitting, for Countryside to grow, in our view. That should have a beneficial impact on operating margins which are below the sector average at 15.8%, larger rivals are now getting over 20% as the company moves towards its target of 3,600 annual completions
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