Market Commentary - Housing, Infrastructure, Construction and Services 30th September 2016
Speedy Hire has issued an update today for the half year to end September and tell us that revenue is a bit ahead of expectations and last year and more importantly that full year PBT will be well ahead of previous expectations and that debt will be much lower, given the sale of the mechanical plant fleet. No surprise that yesterday we saw Atkins lead the field with a 2.5% rise to 1592p, it highest level this year, though it closed last year at 1626. The company has a CMD today which we shall attend.
Speedy Hire has issued an update today for the half year to end September and tell us that revenue is a bit ahead of expectations and last year and more importantly that full year PBT will be well ahead of previous expectations and that debt will be much lower, given the sale of the mechanical plant fleet. The market was looking for eps of around 1.5p this year and 2.5p next. Clearly its good news for holders and shows that the distraction of the EGM did not affect trading. The changes introduced in the last few years are having a positive impact. It may take some time for the business to get back to sustained EBITDA above £70m and he margins A Plant is making but it is possible. Its strategy of getting baseload from companies with exposure to good, relatively stable parts of the contracting market such as infrastructure, transport and utilities is creating a positive outcome. Assuming that net debt is around £85m the EV of the business at close last night was £260m (share price 33.8p). With EBITDA at around £60-65m this year the company looks to be inexpensive.
No surprise that yesterday we saw Atkins lead the field with a 2.5% rise to 1592p, it highest level this year, though it closed last year at 1626. The company has a CMD today which we shall attend. Capita, again not a surprise given the news, was down 26.8% at 697p, a level not seen since July 2012. Amid all of the noise yesterday it was possibly not noticed that Mitie regained some strength and closed up 1.7% at 189p and both Grafton and Wolseley returned to the levels they were at prior to the full year numbers earlier in the week from WOS. The negative move in the price of WOS, given the unexpected £100m UK exceptional, was not a surprise but the collateral damage to Grafton was completely unjustified. Target prices for Grafton should be near 600p based on its results compared with last night’s close at 495p and on its exposure to Ireland and its performance in Selco.
Regarding Mitie, the share price hit has been stronger than perhaps it might and shorts covering as well as genuine long buying might be behind the rise. Our stance is consistent, it is not a bad company but it is not as good as the management was trying to make out in the financial numbers. It looks as though it will dispose of its healthcare operations and focus entirely on FM which may make it more attractive to a wide range of investors and industry watchers.
Finally, just a quick word on the outsourcers before heading off to the Atkins CMD. What is clear is that the amount of new work available in the UK at present is low and possibly getting lower. The two big recent announcement, £4bn Procure 22 with the NHS and the £600m project at Barts Hospital are not new work but simply a review of existing contracts. In the public sector there has been an hiatus in each of the last three years which has sowed procurement processes and decisions, 2014 saw the Scottish Refendum, 2015 the General Election and of course this year we had the EU referendum. We have the go ahead for Hinkley and projects such as the Mersey gateway but those are exceptions as balancing those are the lack of take off in PF2 and a slowing in education spend. And in the private sector there are now Brexit inspired delays in IT and recruitment in particular that are hindering progress. So for UK focussed outsourcers life is tough and organic growth hard to fined. There are some projects being tendered in Defence, such as Hestia, but again its exceptions not the norm of the 2000-2008 period. For investors therefore it seems that teh best exposure is with those that have substantial operations outside the UK, such as Serco, G4S, Rentokil and Compass or the companies that have found ways of handling slow UK growth such as Kier, Carillion and Mears. The recent problems have been due to companies trying to make the numbers fit the narrative and probably with Mitie and Capita’s issue now out in the open we have reached the end of the phase of pretending life was as good as it was up to 2008, when te De Anne Julius report was published, which highlighted the slowing growth in UK outsourcing and the need to take overseas the outsourcing skills learned in the UK.
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