Market Commentary - Housing, Infrastructure, Construction and Services - 30th November 2016
Its a relatively quiet day for newsflow and with temperatures at current levels it will be pretty quiet on many construction sites first thing this morning! Telford Homes has produced it interims and Breedon has issued a trading update and told us of an acquisition that will cost up to £15.7m, Sherburn Minerals. The moves yesterday were more about the ebb and flow of trading than signals regarding future moves. Interserve was the best performer, up 1.6% on only 250,035 shares traded.
Its a relatively quiet day for newsflow and with temperatures at current levels it will be pretty quiet on many construction sites first thing this morning! Telford Homes has produced it interims and Breedon has issued a trading update and told us of an acquisition that will cost up to £15.7m, Sherburn Minerals. Breedon has flagged that its earning for the current year will be ahead of existing expectations, assuming the weather remains favourable. Both companies reflect that while the rationale for a slowdown exists they have yet to see it in terms of demand falling, other than in the immediate post Referendum phase. More below.
The moves yesterday were more about the ebb and flow of trading than signals regarding future moves. Interserve was the best performer, up 1.6% on only 250,035 shares traded. The risk level on a purchase of IRV is relatively high in our view given that there are too many unknowns about the underlying financial position and the top team for the long term. There is no doubt that it has some good contracts but as experience elsewhere shows it’s the few really bad ones that damage the business. G4S was the largest loser, down 2.1% to 240p having spent most of the month at higher levels after its positive update on 2nd November. The company has no planned update posted on its website as it nears the year end. New FD Tim Weller is likely to have found a very clean set of accounts (given his previous role as NED and the approach taken by his two immediate predecessors) and trading is unlikely to have altered substantially. With EPS of 15.5-16.5p expected this year (depending on FX) the price at close seems to us to be a slightly better entry point as the stock moves nearer to target levels of 280-300p.
Telford sees few if any barriers to its goals of exceeding £50m PBT by the year to end March 2019 and doubling the size of the business over the next five years. Having said that the numbers this morning do not show a company at the top of its game. Revenue is down at £104m versus £140m this time last year as open market completions fell to 85 units from 283 last year. Telford builds a relatively small number of mid to high rise projects so the timing of these can have a substantial impact on shirt term trading numbers. The company has indicated today that forward sales are high at £700m to be delivered from next year onwards, that sales since the year end are a t a high level and that all prior year forward sales have completed as expected. The numbers will be very 2H weighted this year but the company maintains that earnings will be in line with expectations.
Investors must however be concerned about two aspects of the numbers. Firstly, the reduced earnings (GM 22% versus 26% last year) are boosted by profit recognition on schemes that are yet to complete and in future years will be slightly lower than in 15/16 due to forward funding arrangements that create a beneficial cash profile. Secondly, while the company is highly positive about its market situation and the shortage of product in its market segment it reduced plot acquisition in the post referendum period. Mmmm. We expect that investors will give the company the benefit of the doubt in terms of the timing of completions and will accept the longer term position remains positive but shifting costs and revenues between accounting periods is a dangerous game.
Breedon’s progress continues at a strong pace. The update today tells us that in the first 10 months of the year revenue was 31% higher than last year boosted by three months ownership of Hope Construction Materials. In terms of earnings the expected synergies from the Hope deal are coming through earlier than expected but no data is provided. EPS of 3.1p were expected this year and 3.8p next year, prior to the acquisition announced today and the news that trading is ahead of expectations. Sherburn Minerals is based in Durham, employs 110 people and operates in four quarries and five ready mix plants from the north of the Lake District up to Hadrian’s Wall. Revenue in the year to end March 2016 was £16.1m and the EBITDA was £1.8m. £15.5m of the consideration is payable now and the remainder in 12 months time. Importantly, given Breedon’s status as a Cement producer these days, Sherburn has two import terminals with substantial storage capacity, for cement and cementitious materials, which are important “weapons” for Breedon in its business as its single cement operation provides both great benefits but also some vulnerability to operational issues.
At 73p Breedon is not cheap but it keeps performing well and the demand backdrop is highly favourable. Also its main rivals have a broad range of geographies to consider while Breedon can just focus on the UK which is a big plus for investors given the strategic assets in the operations and the expected spend on construction and infrastructure
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