Market Commentary - Housing, Infrastructure, Construction and Services - 4th November 2016
There is no new news this morning of note in the sector. The news that Severfield has won 22 Bishopsgate (not Broadgate as we stated yesterday) and that the project is going ahead at all is positive, balanced by news that a US/Spanish multi national has put on hold a major scheme in the City. The moves yesterday were predictable given the news on Voting on Article 50. The improvement in the value of Sterling caused Compass and Rentokil to lose pace, falling 2.4% and 1.1% respectively. Berendsen is still struggling to get support and fell 1.5% to 941p. In financial terms alone he share price reaction is severe
There is no new news this morning of note in the sector. The news that Severfield has won 22 Bishopsgate (not Broadgate as we stated yesterday) and that the project is going ahead at all is positive, balanced by news that a US/Spanish multi national has put on hold a major scheme in the City. The volatility in the sector will continue and as we saw yesterday it remains highly sensitive to small pieces of news. And in general the more uncertain the situation becomes the more the trend is down in this sector. Investors will make up their own minds about the potential impact of a General Election called because judges believe it’s unconstitutional for the executive to use Royal Prerogative to invoke Article 50.
The moves yesterday were predictable given the news on Voting on Article 50. The improvement in the value of Sterling caused Compass and Rentokil to lose pace, falling 2.4% and 1.1% respectively. The falls are nothing more than investors putting buy orders on hold given external events. Given the current calls for a General Election from the extreme wing of the Brexit we can guess what might happen to Sterling in that situation if there is the prospect of Corbyn or Farron getting the keys to No10. G4S was the main winner yesterday, rising 3.5% to 215p on its upbeat trading statement. It also has US operations of course but good trading news trumped the FX changes, if we can use that expression these days. As indicated yesterday G4S will be getting target prices of 280-300p written next to its name right now so should see more support at 251p. Rentokil and Compass are arguably priced for perfection only at this stage so any small piece of news could cause a wobble and it did.
Berendsen is still struggling to get support and fell 1.5% to 941p. In financial terms alone he share price reaction is severe. The shares recent peak was at 1337p at the end of July and was 1231p at close the day before the profit warning. The 25% share price decline based on a warning that operating profit this year will be around 10% lower than expected. It may be that Berendsen was simply priced for perfection before the warning and this is a sharp reminder. It has not become a bad company and its finances are not in question but its valuation looks a little more realistic now.
We were able to have a longer conversation yesterday with Morgan Sindall following the release of its trading update. What is clear is that if the company can achieve near normal margins in each of its operations the prospect of PBT rising from £42-45m this year to near £80m on a 2/3 year timescale is realistic. The main vulnerability in that scenario is probably Fit-Out which makes margins of around 4-4.5% on annual revenue of around £600m but at present it has record order books. Any decline in Fit-Out (if that happens) should be balanced, in our view by the growth in Affordable Housing, an area which has been neglected by MGNS in recent years and which should show some of it growth prospects this year with further advances thereafter.
The company been through a bad period for the last seven years partly due to its markets and partly self inflicted (poor acquisitions, taking the wrong risks) but is now in a much more stable condition and does not have the substantial claims that existed until quite recently (Faslane). Add to the good trading prospects the strong cash position mentioned yesterday and absence of a pension deficit and it’s not hard to see how the company might vastly improve its EPS from around 78p this year to over 100p in 2018. We have to expect that the dividend will increase generously in that scenario from around 32-34p this year which is a cost to the company of around £18m; operating cashflow was 92% of operating profit in 2015 and might be better this year as overdues have been purged. Realistically operating cashflow at 100% of operating profit should be achievable and in term of uses of cash the company has indicated it will not acquire and we know that capex needs are low so what else can it do but be generous to shareholders? We were surprised to see the stock fall 1.1% yesterday but it is thinly traded and there may be a seller for whom teh uplifted numbers are not the issue. The news merited a better outcome and the numbers suggest that the share price will increase soon.
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