Market Commentary - Housing, Infrastructure, Construction and Services 4th April 2017
There is no direct relevant news this morning. The other rises were small with Berendsen’s 1% increase to 740p indicating some support that may be starting to return. The proposed bid for Atkins from SNC- Lavalin has received considerable press coverage so there is limited information we can add at present. Wolseley’s share price has dipped following the recent half year results and was the largest faller yesterday, down a further 1.5% to 4944p.
There is no direct relevant news this morning. The proposed bid for Atkins from SNC- Lavalin has received considerable press coverage so there is limited information we can add at present. The two key issues right now are of course what might go wrong and will another party join the race to buy.
SNC-Lavalin has confirmed the proposed bid in an announcement this morning and importantly outlined how it might fund the deal. It has confirmed it has lined up C$1.9bn of the C$3.5bn (£2.1bn) needed in a mixture of 21% equity and the rest in loans and that the further funding will include no more than 33% equity. The bid is a multiple of 12x historic EBITDA.
The proposed cash bid works out at 2080p a share, well ahead of the closing price last night of 1953p so the market is fully aware of execution risk. Both parties have indicated the bid is subject to terms and conditions. Foremost among the issues will be the pension deficit. The triennial valuation is taking place at present and the actuary’s view at end September was the deficit was £335m, based on a discount rate of 2.4%. The discount rate is lower than many we have seen used recently which is unhelpful; the 2.8% used by many others would reduce the deficit considerably. But the current commitment to pay around £33m and year rising at 2.5% a year until March 2025 makes a substantial hole in the free cash yield for any buyer; the deficit funding was equal to 19% of EBITDA last year so it’s not a small portion of the earnings. Of course an accommodation with the pension trustees will be one of the thornier issues in the discussions and satisfying them will be essential. The other main problem is of course the novation of contracts from independent UK based Atkins to a new entity and there will be many of those to explore very quickly before a bid is confirmed. Atkins has a lot of small contracts so the task of taking soundings on novation is not small.
Another party could join the race for Atkins of course. CH2M has already been mentioned in the press as having made an approach and that is a reasonable start point. The valuation is not overly stretching from what we can see, excluding the pension deficit funding. SNC-Lavalin has been touted as having geography that is compatible with that of Atkins but there is also great appeal but that applies to a number, especially those who might covet the UK position of Atkins such as AECOM and WSP. Some Euroland entities might emerge as suitors but they are somewhat smaller and not helped by recent weak conditions in existing main markets. The search for global scale in engineering consulting has not. We are not speculating on who might take an active interest but there are others around.
The 27% rise in Atkins was the main rise yesterday and enough has been said about that! The moves in the sector were in a narrow range yesterday. The other rises were small with Berendsen’s 1% increase to 740p indicating some support that may be starting to return. Our sense is that the share price has been hit rather harshly and the business has better underlying prospects than the current valuation of 12.7x prospective p/e suggests. Signs of success from the substantial number of initiatives underway will create a large difference to perceptions but at present, to some outsiders, there seems to be an overload in intended improvements.
Wolseley’s share price has dipped following the recent half year results and was the largest faller yesterday, down a further 1.5% to 4944p. The range of target prices is wide as we have seen one as low as 4960p and one as high as 5900p; the trend post results was for targets to rise so the 4% fall since the announcement is the opposite of what might be expected. We take the view that Wolseley has clear up the issue of where it is domiciled as soon as possible. The Charlie Bank’s model has been so successful at Ferguson it has allowed it to more than double market share in the US while elsewhere it is has struggled. Some 85% of earnings are in the US. The logic of the full year results presentation was that it would transfer to US domicile but it could not quite say it. UK based funds with a mandate to invest just in UK stocks will be wary of WOS at present even though the historic rating and earnings prospects might point to a higher price.
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