Market Commentary - Housing, Infrastructure, Construction and Services - 6th December 2016
Plenty of news this morning from Wosleley (Q1 Update) and Ashtead, Northgate and Fulcrum Utility Services (Interims). Wolseley’s revenue growth of 1.8% overall on a like for like basis in the first three months will be receive a neutral to negative reception ; it includes 4.2% growth in the USA, L4L, after taking into account 2.4% price deflation.Ashtead’s story is not dissimilar from that of Wolseley in terms of trading and net margins. Fulcrum has chosen to mark this set of results with the signal that it has now “come of age” and is out of its recovery phase and has a high level of opportunities ahead
Plenty of news this morning from Wosleley (Q1 Update) and Ashtead, Northgate and Fulcrum Utility Services (Interims). Wolseley’s revenue growth of 1.8% overall on a like for like basis in the first three months will be receive a neutral to negative reception ; it includes 4.2% growth in the USA, L4L, after taking into account 2.4% price deflation. In the UK sales were down 2.9% L4L in “very competitive markets” though the flip side is that the company was able to improve its GM; RMI remained weak, we are told. Trading profit was up 1.4% L4L and at CER but with one additional trading day in Q1 this year versus last year, earnings at the TP level were static; at actual FX rates for the periods and including acquisitions they were up 21%! The company indicates that trading is in line with expectations at current FX but clearly currency is a big swing factor at present. More below.
Ashtead’s story is not dissimilar from that of Wolseley in terms of trading and net margins. In the first half of the year revenue was up 13% at CER and earnings by the same percentage though operating profit rose at a slower rate of 9%. In the UK A Plant increased revenue by 9% and EBITDA rose by 11% to produce an industry leading margin of 38%, roughly the same as last year and indicative of what Speedy might achieve in the future perhaps. The read across for Speedy is positive.
Fulcrum has chosen to mark this set of results with the signal that it has now “come of age” and is out of its recovery phase and has a high level of opportunities ahead. While revenue was up just 1% in the period to £17.6m EBITDA rose to £3.5m from £2.0m last year and operating cash inflow was £3.8m. The intention to obtain operator licenses for all meters has been fulfilled and that will provide additional growth in the future along with increased operational efficiencies. The order book was up 12% at £24.4m at end September and the company had net cash of £12.5m. The share price has responded to the good news coming from teh business and closed at 51p last night, double the level it was at on 1st December last year. With 3.4p of EPS expected for the year as a whole and with the company indicating a policy of 2x interest cover (thus yielding 3.5% at last night’s close of 51p) we expect the stock to get further support.
Northgate’s story in the UK is that the market remains difficult. We look for read across to the building sector from its fleet hire. The UK fleet ion hire grew by 100 units at the end of the period after a decline of 1,200 last year. That is progress of sorts but hardly shows great prospects and echoes some of the difficulties seen by the Merchants. The average number on hire for the period was 42,000 versus 44,800 last year and operating profit is down 25%. We should not draw too many conclusions from the data at this level but the headlines have been better. In contrast the average number of vehicles on hire in Oreland rose 13% to 3,400 which is perhaps indicative of the upturn in the economy and is positive read across for Grafton.
Somewhat predictably, given FX changes G4S, Rentokil, and Compass were the back markers yesterday. G4S was the largest faller, down 4.6% to 232p. Balancing that situation Companies with a high percentage of UK earnings were the best gainers, Carillion was the top riser up 3% to close at 252p (7.5% prospective yield) followed by Interserve, Polypipe, Mitie, Kier and Morgan Sindall, in that order.
Carillion has its update on Wednesday and we have little feeling that the trading numbers will not disappoint for the current year and could be quite positive. The financial constraints under which the company has operated for the last six years may have caused it to be more risk averse in its project selection, earlier than its peers. Astute investors will also not failed to have noted that if bond yields are rising there might be a positive impact on Carillion’s pension deficit, all other things being equal. That will be clearer in the spring at the results. As bond yields rise so too might inflation assumptions so there will be a balance to be struck. It remains the most shorted stock on the UK market at 21.5% according to Castellain Capital. When the tide of sentiment turns on Carillion the rush for the stock may create a very tight squeeze.
Back to Wolseley, there is a conference call at 9am today in which we shall participate. The spend on acquisitions in Q1 at £206m, plus £10m since the period end will aid future earnings growth and we hope the call will enlighten further on where those deal were done. With sales outside the US down in all three main areas by near 3% L4L it becomes questionable why WOS is allocating capital to by more operations before improving further what it currently owns. The purchases appear to have been in the US and in Q1 four operations were bought with a combined annualised revenue of £142m The story at the end of Q1 is more of the same, great showing in most aspects of the US operations but troubles almost everywhere else. The £100m restructure of the UK operations has started with a consultation process but is not yet showing in the reported underlying trading numbers. At 4693p at close last night and with c 270-290p of EPS excepted (depending on FX) teh shares are priced for a great performance this year and Q1 suggests that it will be very good in teh US but still difficult in other geographies. The price may drift as a result of those circumstances.
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.