Market Commentary - Housing, Infrastructure, Construction and Services - 5th December 2016
The news today for the sector may be overshadowed by macro factors as Sterling is trading as we write at above £1=€1.2 for the first time since late June.
The HICS sector stocks moved in a narrow band on Friday last with more fallers than risers; no surprise on a day when the market fell 0.3%. There were only three risers in the sector last week in our universe as the market fell 1.5% and the sector by a similar margin
The news today for the sector may be overshadowed by macro factors as Sterling is trading as we write at above £1=€1.2 for the first time since late June. The FX tailwind that some benefited valuations recently is diminished, though £ versus US$ change is less pronounced £ is notably stronger against it. Compass, G4S, Wolseley and Rentokil are the stocks most obviously affected.
An update this morning from St Modwen and interim numbers from Purplebricks provide guides to investors. St Modwen indicates that its recent experience is thatere is good demand in its regional commercial portfolio and for its residential building and land development. The company is slightly more circumspect about the sale of its New Covent Garden /10 acre Nine Elms Square site which is being marketed at present. Overall St Modwen is positive and while it points to increased uncertainty it has not hit trading so far.
Purplebricks is such a new operation that market read across is clouded by its growth trajectory and the statement reads more like a sales brochure than a financial report. Its revenue more than doubled to £18.3m in the six months to end October from £7.2m last year and in the UK positive EBITDA of £0.3m was achieved though the £2.5m EBITDA loss in Australia means that dividends are some way off. The Purplebricks model is gaining traction in the UK but not just for that company. The front page headline that revenue per customer is up 21% to £1,000 is an odd one for a company that boasts that it is offering a low cost service. Mmmm. Sometimes new entrants get share by offering low prices and adopt a conventional model when cruising altitude is reached. Comments from Purplebricks indicate that the market is “tough” which is consistent with what we are hearing from others operating in the market for supporting transactions in second hand homes.
Ashtead has its interims tomorrow along with Northgate, white van man’s favourite rental company and both will provide read across. Updates are due this week from Wolseley tomorrow, Carillion on Wednesday 7th, Gleeson and Capita on Thursday 8th and Volution may tell us something about trading to coincide with its AGM on Friday 9th
The HICS sector stocks moved in a narrow band on Friday last with more fallers than risers; no surprise on a day when the market fell 0.3%. Serco showed the most strength, up 1.9% to 135p on 2.3m shares traded; as we indicated on Friday the CMD was well presented and would turn any doubters into believers. The stock is not cheap on current earnings but it has consistently beaten its guidance and progress is strong to date. Serco has some operations in the US which provided 25% of trading profit in 1H16, pre overheads, so it mat see some small impact from FX changes though in its case otehr factors overshadow that issue, in our view. Interserve showed the most weakness on the day, down 3.2% to 296p; the hiatus at the top is creating uncertainty with investors and customers. It is notable that no main board member has City employment experience. The upside from here for IRV is very positive, assuming the balance sheet needs no external support (which we doubt) and a credible new CEO is appointed soon.
Moves Last Week
There were only three risers in the sector last week in our universe as the market fell 1.5% and the sector by a similar margin. The housebuilders had a showing that was better than average over the week with Berkeley’s views providing a positive fillip to valuations on Friday. Some of the larger international services stocks drifted later in the week as Brexit FX benefits faded a little; £ rose 1.4% against the US$ between Wednesday and Friday at close as the mood changed on the Brexit terms.
While FX had a n influence the main loser last week was Berendsen, down 4.9% to 847p, closely followed by Capita down 4.8% to 542p. BRSN has simply failed to gain credibility with investors following its warning and perhaps more downwards guidance is expected. CPI has a the chance to make its case this week in its update but the market suspects, rightly in our view, that the new information will make grim reading. The best time to provide a warning is when the market is expecting it! The balance sheet needs some restoration so an equity cash call seems likely; a strong B/S is needed to win work in the public sector. And intangibles are often discounted as an asset b some key customers.
The risers were few in the week to Friday last with Galliford Try leading the field with a 3.5% rise, a benefit of the better sentiment for housebuilders. At 1293p and with EPS at 150p in the year to June 2017 and a 7.4% yield GFRD looks cheap on many measures. It all depends on your view of housebuilders. The read across to Galliford from what Kier was saying about Partrnership Homes on Wednesday does not seem to have emerged as read across for the company or Morgan Sindall. That puzzles us a bit, in terms of it being a missed opportunity but at present investors are sitting on their hands in this space.
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