Market Commentary - Housing, Infrastructure, Construction and Services 3rd April 2017
Renew Holdings has issued one of its usual short trading updates this morning up to the end of its half year to March 2017. G4S has made another disposal.
Babcock has announced a new contract which may silence some of its critics. This week is slow in terms of expected announcements. HSS Hire reports its finals for 2016 on Wednesday and Homeserve will update on Thursday with news of trading up to its year end of March 2017.
Renew Holdings has issued one of its usual short trading updates this morning up to the end of its half year to March 2017. No numbers are provided and we are just told that trading is in line and that while there will be some debt at the half year the expectation is that the company will have net cash by the year end. Renew does not need to say that much as it has delivered to shareholders in the last ten years. The share price was 107p in early April 2017, 29p in July 2009 and closed at 435p on Friday last having seen a bit of selling ahead of the announcement today. The company has succeeded in a difficult fields (Energy, Environmental and Infrastructure engineering services) by managing risk well, developing through organic means and acquisition and keeping very close and relevant to its customers. It is involved in Magnox but it’s too early to tell whether change on that project will impact on Renew, we doubt it. EPS of 32p is expected for the current year and 34p for 2017/18.
G4S has made another disposal. It is minor in the scheme of things. The Youth Services operation in the USA has been sold for £57m cash. Last year it posted PBT of $5.1m so the consideration, based on the data provided, looks sensible for the parties and not worthy of much attention. The key issue is that it is further evidence of the company implementing its strategy which is good news, in our view.
Babcock has announced a new contract which may silence some of its critics. The project is to be the Marine Systems Support Partner for the Royal Navy’s new aircraft carriers and type 45 destroyers. It is named preferred bidder for all four elements of this MoD programme worth some £360m over seven years. It’s not a big contract but it’s a win and much needed in terms of the share price as the 20% decline since the middle of last year to 882.5p on Friday is quite steep and consistent. This may help to reduce the selling pressure and the length of the statement (seven long paragraphs) perhaps bears testimony to the management’s concerns.
This week is slow in terms of expected announcements. HSS Hire reports its finals for 2016 on Wednesday and Homeserve will update on Thursday with news of trading up to its year end of March 2017.
Moves on Friday last included Serco rising 4.8% to 115.8p following favourable broker comment. We have not seen the note but we can say that on a “normal” valuation 150p looks at the top end for a stock that will deliver EPS of around 10p in 2019, on current estimates and has yet to declare exactly when it will resume dividends, though we know it will at some point. We are supportive of Serco and have been for several years. The strategy, the transparency of reporting and the focus on performance are all very impressive and the recent big contract wins (Barts and Grafton prison) show the customers are impressed as well. A good company at an expensive price is always better than a bad one at a cheap price so 115.8p will look cheap long term, we believe, but there may be better entry points as the company has been very clear about guidance for this year and next.
Berendsen was the backmarker, down 1.6% at 733p. As we have said recently management has not yet “found its feet” in terms of taking the company to the next stage of its development. With around 58p of EPS forecast for 2017 optically the shares look cheap compared with past valuations but after two profit warnings credibility in forecast is low, despite the reasons for the warnings being trading disjoints of a relatively minor nature.
Moves last week
The sector moved roughly in line with the market last week as both dropped a tad, less than 0.2%. At the end of each quarter we often see unusual moves but not so on this occasion.
The best riser last week was Polypipe which was up 8.5% at 382p, 18.2% YTD. We indicated Friday last that we got the move wrong on Thursday after the results. The meeting was positive and the prospects very good so lack of engaging our brains early in the morning on Friday on observing the rogue number on which we commented was unhelpful; we have apologised. Moving on, the company has tackled the uncertainties that are present in future UK construction demand by building capacity in the Middle East, broadening the product range in the UK and strengthening its relationships with the supply chain. The news that Capex this year will be up 30% on 2016 levels is positive for growth. So the company is well set and expects to get the selling price rises through in Q2 that will enable it. Along with other actions, to maintain margins for the full year on higher revenue. The forecast of earnings per share of around 28p for 2017 have the risks weighted to the upside in our view.
Berendsen was the largest loser last week, down 7.5% to 733p. As indicated above and in earlier notes the mauling of the price seems harsh but with EPS at 58p this year and 59p next year, according to consensus, and as the trend in forecasts is downwards, the share valuation is not a surprise. But a prospective p/e of 12.6x is well below earlier valuations and the market has not changed substantially enough for that to be a large factor in any lowering of the valuation. So it has to be about the businesses capacity to manage its situation and it will take time to repair credibility.
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