Market Commentary - Housing, Infrastructure, Construction and Services 5th October 2016
There are no directly relevant RNS announcements in the sector this morning. The PMI data for UK construction released yesterday was more positive than expected at 52.3 for September, versus 49.2 in August and it is the first time it has been over 50 since May. The only way was up for most stocks in the sector yesterday. Mitie breached the 200p level at one point yesterday closing up 3% at 199.85p and is up 10% from its lowest point.
There are no directly relevant RNS announcements in the sector this morning. The PMI data for UK construction released yesterday was more positive than expected at 52.3 for September, versus 49.2 in August and it is the first time it has been over 50 since May. The number should probably not have been shock as the housebuilders have been positive about demand and their own build volumes. We suspect that the housebuilders will crank up volumes until end November and do as much as they can while mortgages are relatively cheap and available. Interest rates may be stable at a low level but mortgage criteria are tightening. Clearly such data is positive for the sector but from what we are hearing on the ground new work in commercial and industrial is being delayed and decision making in the public sector remains slow.
The only way was up for most stocks in the sector yesterday. The general background is well understood so we shall not comment on that. The sector has a higher yield than most and consequently benefitted more than the average, rising by around 1.8% yesterday against the markets 1.3% increase. G4S was the biggest riser, up 3.3% to 241p. It gained from its overseas exposure and sterling’s decline. We also suspect that the market is beginning to recognise that the company has improved substantially, especially in the areas of cost control and innovation. In recent months we have seen Costain and Atkins showcase their innovation; G4S has a rather more difficult task in showcasing security equipment. Our conversations with the company indicate that much progress has been made in the last three years, especially in advanced techniques that reduce the need for manned security. FX shifts mean that the 15.5p of EPS in the consensus estimates is probably too low and the company has set expectations at a realistic level on an underlying basis.
Mitie breached the 200p level at one point yesterday closing up 3% at 199.85p and is up 10% from its lowest point. The company had a very rocky patch immediately post the profit warning. Our sense is that the selling was overdone based on fundamentals but as ever there is an over reaction in the immediate aftermath. That same trading opportunity may be available with Capita now but is a trading play not an investment!
Only four stocks fell yesterday and in all cases they drifted a bit towards the end of the day and the move was by less than 1%, Capita, Grafton, Polypipe and Mears all fell by between 0.2% and 0.3% on the ebb and flow of trading volumes. We suggested yesterday that Capita may have bottomed out, at least for now and stabilisation yesterday is possibly early evidence of that. Grafton might have been expected to have benefitted a little more from the positive statements on housing spend and FX; we believe the stock is undervalued at the current level of 508p. Polypipe has stabilised at the 280-290p level and is trading on c 12x p/e. It along with Marshalls is at the bottom end of the FTSE250 in terms of market capitalisation. Both stocks need to gain a little to ensure that they are not demoted in the next reshuffle which takes place in December.
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