Market Commentary - Housing, Infrastructure, Construction and Services 3rd February 2017
Homeserve and Smart Metering Systems (SMS) have news this morning; the former has acquired stakes in two online platforms for tradespeople for a combined total of £37m and the latter has issued a positive trading update. Compass was the largest riser yesterday, up 3% after its update. The losers yesterday were all in the category of ones that have some balance sheet concerns.
Homeserve and Smart Metering Systems (SMS) have news this morning; the former has acquired stakes in two online platforms for tradespeople for a combined total of £37m and the latter has issued a positive trading update. Homeserve’s deal to buy a 40% stake in UK’s Checkatrade and a 70% stake in Mallorca based Habitissimo (with options to increase the stakes by a further 35% and 30% respectively) takes it outside its usual business model again, a process that has ended badly when tried previously. The online platforms connect trades with people who have building maintenance jobs. Companies such as Homeserve have a long list of reliable tradespeople which they use so it’s a logical extension, in some people’s minds, to link the trades with non-insurance customers. This type of business extension is not unusual, Carillion has operated a recruitment operation called Skyblue for many years and it operates in the mainstream construction market. Homeserve states that trading is in line at present and that it will deliver good growth in the year to end March 2017; next update is 6th April 2017. More below.
The timeliness of Homeserve’s announcement is odd. Homeserve’s Richard Harpin and Martin Bennett were appointed as Directors of Checkatrade’s companies 14th December 2016 and three members of the founding Byrne family resigned on the same day. Homeserve has effectively controlled the company for over six weeks with its 40% holding and this is the first formal news. Homeserve reveal no financial a data on Checkatrade and a quick look at public sources has drawn a blank so far as the relevant companies are either dormant or have small exemption.
The market in smart meters is hotting up a little. SMS announced that its recurring income rose by 20% in the year to end December 2016 to £41m and that earnings will be in line with expectations. The market has been slow to get started, especially in the domestic space as energy prices have dipped and the perceived benefits of real time knowledge of energy usage are less valuable financially. The 2008 government commitment that all meters will be smart ones by 2019 (implying the replacement of 50m gas and power meters) will not be fulfilled but the rate of installation is rising swiftly and meters are on a 15-20 year replacement cycle in any event. SMS states that the domestic smart meter market “moves apace” which will not have gone unnoticed by emerging rivals such as Fulcrum Utility Services and First Reserve, which recently bought the G4S subsidiary that operates in this area.
Compass was the largest riser yesterday, up 3% after its update. While the pace of revenue growth in the first quarter was below expectations the market was reassured by the conformation that it would be up at 4-5% growth for the full year. The shares have traded at between 1350p and 1500p effectively, since July last year. Relatively slower revenue growth and sluggish margin improvements have held back share price progress and seem likely to continue to do so for a while, despite a good showing yesterday.
The losers yesterday were all in the category of ones that have some balance sheet concerns. Capita was down 2.4% to 487p, Interserve down 1.7% to 329p and Carillion down 1.5% to 217p. The moves themselves were quite small on the day but are a continuation of recent trends in the prices of all three stocks as they approach the reporting of their year end numbers. Carillion had some good news to report on contracts yesterday and the renewal of a debt facility announced on Monday afternoon might have had a positive effect, perhaps it did and the outcome could be worse. But for “bottom fishers” in the investment world all three companies represent an opportunity if an equity raise is needed and who knows, they may already be priced such that an equity raise will improve the current prices on a six month view. Arguably though the cautious might want to wait for the news on any fund raising itself before acting. Capita has the added factor that trackers will be selling as it is virtually certain to leave the FTSE100 index in the early March reshuffle in any event.
Homeserve continues to have us puzzled. The move into providing a digital platform linking non insurance customers to trades can be seen many ways. Firstly, it could indicate great entrepreneurial innovation in making fuller use of its existing expertise in managing databases. But as we said it has tried that before and retrenched expensively back into its core operations. Secondly, and more negatively, it could indicate that it has found expanding the core operations in mature areas such as Spain and the UK and sought a different way to grow the operations. The lack of data on the financial performance of companies in which stakes have been acquired is unhelpful and there is no mention of whether the £37m spent will yield better earnings. Nor has the company revealed the terms of the options for the acquisition of increased stakes in these businesses. This treatment of shareholders is unusual and is another factor in our concern about this company. It will deliver 25p of EPS in the year to end March 2017 and 29p next year, possibly more with the strong FX tailwind so the closing price of 600p is probably good enough for now, in our view.
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