Market Commentary - Housing, Infrastructure, Construction and Services -5th January 2017
Costain and Persimmon have released updates today.Sector stock moves show little sense of direction at present. Costain is one of our “picks” as a stock that is potentially considerably undervalued that could perform very well this year. The news from Persimmon suggests that the housebuilders finished the year well but are starting to pinch themselves a little as conditions rarely remain so good for so long.
Costain and Persimmon have released updates today. The former has reminded us of its strategy and some of its strengths, updated a few numbers such as the order book and net cash and told us it is one of three companies to be appointed to a £500m/four year framework by TfL. It is trading in line with expectations. Persimmon has resisted the temptation to comment on the housing market and that will wait until 27th February when its results are announced though it may be drawn to give some views in the 9am conference call. The figures in the are in line with expectations and show revenue up by 8% which is split 4% volume increase to 15,171 units and 4% ASP rise to £206,700. Forward sales are up 12% on this stage last year as demand remained strong, mortgages are available and well priced and the company has opened two new regions, one at each end of the country, Perth and Launceston. It opened another new region on 2nd January in Nottingham. The statement includes elements of caution due to uncertainty created by Brexit. Cash balances were £913m at the year end! More below.
Sector stock moves show little sense of direction at present. Yesterday there was a negative drift in the sector despite the market rising 0.2%; only seven of the 22 stocks we look at most closely rose. G4S was the best performer regaining some of the previous day’s loss with a 1.2% increase to 232.5p. The stock is undervalued at the current level, in our view and 300p is a realistic target on a 12 month horizon. Polypipe also rose, 0.8% to 321p and is now solidly back at the pre Referendum level. It remains on a lower rating than it should given earnings of 27p expected this year and with growth thereafter. Mitie was the largest faller retracing some recent gains; it fell 3.1% to 220p. Realistically, based on current revenue levels and industry margins 20p of EPS is a norm level for Mitie and the new CEO will need to review contracts thoroughly before the 2016 results are released and make adequate provisions. There is a lot to suggest Mitie is up with events at 220p for the time being and until Phil Bentley has formed his views more fully.
Costain is one of our “picks” as a stock that is potentially considerably undervalued that could perform very well this year. The company states that it is trading in line with expectations which we bleiev are for 27.5p of EPS last year and 31p for 2017. But that masks the potential impact that ending the cash and profit drain which the Manchester waste to energy project is causing; if that is excluded EPS of nearer 40p is more likely. The Natural Resources operation recorded a £8.4m operating loss at the halfway stage primarily due to this one project; the data suggests that it would have made a small profit ex Manchester. The company provides no further update this morning and at the interims indicated that it hoped to finalise the issues on the plant early this year; we suspect that other related legal and insurance issues may take a little longer. Enough of the not so good news and on with the good stuff. The order book has remained high at £3.9bn and in in preferred bidder status for a further £500m of work at present. Staff numbers we are told are now at 4,100 of which 1,200 are now in “consultancy” type areas which is of course good for margins. The other major feature is that net cash is at over £100m which is no doubt why Tony Bickerstaff had a big smile on his face when we bumped into him a few weeks ago. We stick with our view that Costain is highly undervalued and 500p is a realistic target.
The news from Persimmon suggests that the housebuilders finished the year well but are starting to pinch themselves a little as conditions rarely remain so good for so long. There are remarks in the text about remaining disciplined and focussed on high quality growth. We take that to mean that it would prefer to proceed at a pace of its choosing rather than be “forced” to increase volumes to satisfy political or other agendas. The company acquired 18,700 plots in the year which is well ahead of completions; the split between market purchases and strategic land’s contribution is not stated. GM for the year as a whole improved and was strong in 2H. EPS of 192p are expected for 2016 and roughly similar level for the year just started. The 110p a share dividend for this year and next is affordable based on existing cash balances and the forward orders outlined along with the regional expansion that will increase output, other things being equal. The market’s expectation of flat earnings this year may seem pessimistic to some but just five days in and with Brexit uncertainty some caution is needed; housing has not suddenly changed to not being cyclical. But there is some evidence that the up part of the cycle is extended this time around. The shares closed last night at 1810p, 2.8% up on the day.
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