Market Commentary - Housing, Infrastructure, Construction and Services 2nd May 2017
News this morning comes from Bovis with a trading update related to its AGM, Breedon has made a small bolt-on acquisition and Civitas Social Housing has spent a bit more of the £350m of equity raised. Bovis has made the expected affirmation that the start point is getting the build process to where it should be. Breedon has bought a small “mini mix” concrete operator based in Oldbury. News this week is expected from Carillion on Wednesday at its AGM, at which it usually provides an update. On Thursday from Morgan Sindall, has its AGM and G4S provides an update and on Friday T Clarke has its AGM and will most likely tell us about trading YTD.
News this morning comes from Bovis with a trading update related to its AGM, Breedon has made a small bolt-on acquisition and Civitas Social Housing has spent a bit more of the £350m of equity raised.
Bovis has made the expected affirmation that the start point is getting the build process to where it should be. New CEO Greg Fitzgerald is wasting no time by visiting all sites and getting right what exists before resuming growth. The read across on market demand is positive; the company states that interest is high, evidenced by prospects per site being higher than last year, though no data is provided. The high level of visitors may also be evidence that the brand, while possibly tainted by recent experience, is recoverable saved in partly by location trumping brand in housing in the UK. The issue therefore is whether Greg will make the difference. It’s too early for clear signs but the focus on getting the basics right is encouraging. With the sales rate at just 0.48, well below the industry average, there is scope for much productivity improvement in that key measure and other factors such a good landbank, which means most of 2018 production already has the required consents, point to a high probability of success.
At 921p making the case for Bovis being a recovery play within the sector is not difficult but it will be 2019 before it shows fully in the business and in the meantime there is a lot that might happen in the housing market. The risk level on Greg getting the best from Bovis is low in our view, the likelihood is that he will succeed swiftly so any risk is more market that Bovis specific in our view. The company has confirmed the dividend increase at 30p for last year’s final (up from 26.3p); it also stated that the dividend for 2017 will be at least the same as in 2016 at 45p for the year.
Breedon has bought a small “mini mix” concrete operator based in Oldbury. No data is provided on the business which seems to have little more than eight mixer trucks and a customer base in the West Midlands for its four tonne loads of concrete and screeds. Operating downstream from its quarries is good business for Breedon as it allows them to sell lower grade quarry product that has limited use other than in ready mix at a good price. There is no trading news reported but we suspect that the positive first quarter continued into April, given what the housebuilders are saying and the favourable weather conditions.
Civitas has struggled to find housing stock and the news today shows it not really getting any easier. The company has paid £11m for 10 properties in three different regions with 55 tenancies, all of which appear to be special needs ones. The yield is not stated but said to be in line with expectations and will be enhanced when leverage is applied. At present the company has spent a small part of the £350m equity raised, we estimate around £50m, so seeking debt funding might be premature. But such leverage is needed for the company to get the returns promised in the float. We expect Civitas will continue to struggle to get scale as most Institutions can invest in the sector with requiring a quoted vehicle, with its associated costs, to mediate in the process. Most Housing Associations do not need to sell their stock.
News this week is expected from Carillion on Wednesday at its AGM, at which it usually provides an update. On Thursday from Morgan Sindall, has its AGM and G4S provides an update and on Friday T Clarke has its AGM and will most likely tell us about trading YTD..
In the last trading session on Friday Balfour Beatty was the best performer, up 2.7% to 291.8p. The market capitalisation is now £2bn. Assuming that the PPP/PFU portfolio is worth £1.2bn the £0.8bn implied price tag on the rest of the business remains very low. OK on a p/e basis on current earnings expectations is look expensive but value it as a long term assets (PPP/PFI) and an operating company and a value of 350p+ a share is not out of court.
Berendsen was the biggest loser in the last session, down 3.0% to 842p but it was not a big issue as it was just some retracement on earlier gains. The valuation at just under 14x will look quite cheap if the management gets the full benefit of its many initiatives into its earnings.
Last weeks moves
The market rose 1.3% last week but the sector’s progress was quite mixed with the housebuilders faltering, down 0.4% (though still up 11.4% YTD) and the Services stocks rising 1.9% and the Construction and Materials index up 3.6%. The HICS segment is still well ahead of the market YTD. On fundamentals we expect it to shed some of the relative gain but recent M&A talk (Bovis & Redrow or Galliford Try) and action (e.g. SNC-Lavalin & Atkins) point to such speculation being a support for sector share prices.
Berendsen was the best riser over the week as a whole, up 7.8% despite the dip on Friday. We have commented earlier on the substantial number of management initiatives that we suspect might be hard for the business to digest. But certainly there seems to be no external reason for the company not to succeed.
The largest faller, down just 2.4%, was Galliford Try as it is having to work hard to get a following at present. The management changes that are not yet proven and difficulties in Construction, allied with market nerves about housing, are combining to create a bit more uncertainty than normal. The approach for Bovis also related some nerves about strategy implementation coming so soon after a good declaration of the new CEO’s goals and ideas. With 150p of EPS expected this year and a yield of 6.5% Galliford Try looks cheap on that measure and on many others.
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.