Market Commentary - Housing, Infrastructure, Construction and Services 31st March 2017
Speedy has issued a short trading update to mark the end of its trading this year. It told us in early February that earnings for the current year will be above the existing expectations and since then there have been a few Director share purchases. Atkins rose by 1.6% yesterday to close at 1512p. The market may have woken up to the comments that imply it had a very good year in 2016/17, which ends today.
Speedy has issued a short trading update to mark the end of its trading this year. It told us in early February that earnings for the current year will be above the existing expectations and since then there have been a few Director share purchases. The indication this morning is that revenue for the full year (ex disposals) will be 7% ahead of last year; the indication of the 3Q revenue rise of 10.6% is consistent as the year started slowly and the Xmas period was very strong. The other bit of data released this morning is that net debt will be below £80m at the year end, in part due to a reduction in the hire fleet. That means net debt will be not much more than 1x EBITDA which is low for a hire company; our understanding from earlier conversations with the company is that it is not missing opportunities by taking an overly cautious approach to borrowing. It is looking at a range of expansion prospects and 1.5x net debt/EBITDA is a comfortable level, but will only spend if it is justified. The plans to reduce costs and raise efficiencies is continuing and utilisation for 2016 was substantially higher than in the prior year. The efforts of the last two years have been focussed on building a stable platform not on maximising short term earnings. That platform, in terms of IT, depot structure, management culture and asset base now exists, from what we see.
The business operations at Speedy have been improved substantially and the company now has a very strong base on which to build and compete with Ashtead’s A Plant, the other well-run company in the sector. Our sense is these two are in a much different place than HSS which reports next week; that company is overburdened with expensive property lease commitments and a deteriorating asset base that is causing loss of market share, from what we hear from its customers and our observations of the data. The market for hire remains positive and market growth is likely to be higher than CPA construction forecasts of c 1% for 2016. At 52p a share Speedy has an Enterprise Value of around £350m, comprising £273m market capitalisation plus let’s say £80m of net debt. With EBITDA of around £75m the valuation EV/EBITDA of 4.7x historic is low for a UK hire operation. We suspect the share price will get some support today.
Atkins rose by 1.6% yesterday to close at 1512p. The market may have woken up to the comments that imply it had a very good year in 2016/17, which ends today. The trading update is due on 12th April and we are expecting a positive update. Atkins is traditionally quite cautious in its approach to update briefings; the company will say realistic! We appreciate its candour and it has helped it to retain its great credibility. So it will be interesting to see if the tone on 12th April is a positive as the one we heard on Tuesday this week. Note also that Mitie has been a consistent riser in recent days and closed yesterday up 1.4% at 217.6p. It is hard to believe that there will not be some further accounting adjustments when it releases it 16/17 results in May as the new top team will only get one more shot at that. Our reading of the numbers is that given its current size, scale and shareholding 20p of EPS is the stable level, probably to be reached in 2018/19. So the price could be a little ahead of itself. Pre close briefings have been positive and the longer term picture we suspect is good but there may be a better entry point in the coming months than the current level.
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