Market Commentary - Housing, Infrastructure, Construction and Services 31st October 2016
There is no formal news this morning from HICS sector stocks. The FT carries a report indicating that Capita is to undergo a full review of its operations. News expected this week comes from Persimmon with a trading update on Wednesday and Howden Joinery with its Interims on Thursday. Berendsen is still waiting for the cavalry (of buyers) to arrive and fell a further 4.4% on Friday last to 985p
There is no formal news this morning from HICS sector stocks. The FT carries a report indicating that Capita is to undergo a full review of its operations. Some commentators may wonder what management has been doing if it’s not reviewing its work on a constant basis. New Chairman Ian Powell will no doubt be closely involved and needs to be as there are clearly issues of management not keeping pace with market changes. Our sense is that any such review is likely to lead to one-off costs and restructure and that may bring an equity raise closer. We had expected one might not be needed. Aside from contract reviews Capita may need to look closely at its Administration costs which at 14% of revenue are way ahead of the peer group in outsourcing; it’s a crude measure and all costs are open to interpretation and categorisation but the gap with rivals is very wide. In terms of the company now recognising it has a problem it is at Stage One of the process of change; the next stages might be tough and expensive.
News expected this week comes from Persimmon with a trading update on Wednesday and Howden Joinery with its Interims on Thursday
Friday last saw Carillion top the risers with a 2.3% rise closely followed by Galliford Try which benefitted from the more positive sentiment towards the housebuilders. Carillion has watched many peers have substantial warnings and it has not hit the buffers. The shorts at 21% of the ordinary stock are clearly taking a view that it’s just a matter of time. The evidence to date is that they may have to wait a while longer and at near 8% pa cost (foregone dividend plus stock borrowing charge) before taking into account any leverage involved, the carry is quite expensive. Zafar Khan commences as the new FD in the New Year and will no doubt have tackling the conundrum of CLLN’s balance sheet high on his agenda.
Berendsen is still waiting for the cavalry (of buyers) to arrive and fell a further 4.4% on Friday last to 985p. The c. 10% reduction in guidance (at CER from £170m to c £155m) for operating profit this year has “translated” into a 20% drop in its NAV which is clearly large but not necessarily wrong. Forecasts of EPS this year of 62-65p are the likely range of outcomes. So the prospective p/e is around 16x. The company has been assertive in its claims that the issues that have caused to reduced expectations for this year are being addressed. But investors may want more proof before restoring the stock to a premium rating and even at 16x and with just c 3% annual organic growth the view might be that its up with events.
There was some Press coverage at the weekend regarding offsite residential construction. We attended the Offsite Construction show a few weeks ago and have taken an interest in the area. There are two key issues in our mind. Firstly, there is no doubt an increase in capacity and the use of offfsite techniques. And there is a set of factors emerging that could cause its development to accelerate fast including the rise of demand from PRS and Local Government and other players who are not driven by site sales rates, emerging lack of skills, need for quality and H&S and many others. Secondly, the supply side is still in its infancy with few manufacturers of the materials required and a lack of available, oven ready land. Looking at the quoted entities SIG and Kingspan are the best placed to take immediate benefit as both have the capability to make Structural Insulated Panels (SIPS) that are widely used in the sector. SIG has targeted increasing revenue in its Insulshell operation such that revenue will rise to £150m in 2018 from around £40m this year.
There are two main other methods of building offsite, steel frame and pre cast panels and the supply chain in these areas is also nascent. Laing O’Rourke is planning a factory for offsite residential and L&G has built one capable of over 3,000 units a year but it is still not in full production. The mainstream housebuilders make some of their own panels, Persimmon’s Space 4 being the main producer but that capacity is tied up in its own output. Taylor Wimpey withdrew from its facility, Prestoplan, as the ROCE on building houses was much more attractive. Opportunities to invest in the sector may emerge but of the current key players several are owned by overseas companies, such as SIPS panel maker Unilin and others are privately owned. Government Ministers support for the sector is a good thing but as we all know government willing something to happen does not work that often in the real world. There is an increased awareness of the advantages of Offsite and a very active trade association.
Moves last week
The sector dipped a little more than the market last week sustaining its underperformance YTD after three years of outperformance 2013-15. The market is up around 10% but the sector is level YTD. The prospects for the sector to improve, on a relative basis, are highly limited, in our view. The data show that only four stocks in our universe of 22 rose last week so there is clearly some caution in the sector.
Berendsen’s 21% decline was the main change and we have mentioned the stock above.
Galliford Try fell by 7.9% last week but of the 106p decline 56p can arguably be attributed to the stock going XD with its final dividend payment. The shares were down just 4% if that is taken into account. The shares are down 15% YTD , taking into account the very recent dividend which is less than most of its peers in the housing sector and reflects the potential growth of its partnership housing operations and improving margins in construction
The small number of risers last week and the range of increase, between 1% and 2% suggests a lack of support for the sector right now. The Autumn Statement may be a catalyst for positive changes but companies are not optimistic and neither are we.
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