Market Commentary - Housing, Infrastructure, Construction and Services 6th October 2016
There is no reported news this morning from HICS stocks of the falls yesterday were plus/minus 1% but five stocks fell by more than 2%, Interserve (2.1%), G4S (2.5%), Travis Perkins (2.5%), SIG (2.7%) and Compass (3.3%). The positive sentiment shown on Monday and Tuesday gave way to the opposite yesterday with only one riser among the 22 stocks we look at most closely.
There is no reported news this morning from HICS stocks. Balfour Beatty, SIG and Travis Perkins all go XD today with interim payments of 0.9p, 1.83p and 15.25p. BBY closed last night at 279p, SIG at 118p and Travis Perkins at 1568p so the interim payment in itself may not have material impact today but will have some influence
The positive sentiment shown on Monday and Tuesday gave way to the opposite yesterday with only one riser among the 22 stocks we look at most closely. Mears was up 1.2% to 470p as its main activities in Social Housing seem likely to provide growing earnings in the mid and long term and therefore stable returns. The prospective dividend of at least 12p this year may be only a 2.6% yield but in the current climate that is attractive.
Most of the falls yesterday were plus/minus 1% but five stocks fell by more than 2%, Interserve (2.1%), G4S (2.5%), Travis Perkins (2.5%), SIG (2.7%) and Compass (3.3%). IRV is failing to find real support. Short positions in the stocks are few so the message from the market is not consistent for a stock with a p/e of 5.8x (including Equipment services as continuing) and a prospective yield of 6.8%. It may be that with a market capitalisation of £550m it is just not liquid enough for long/short funds. The review of the Equipment Services operation is taking a while and it may be that its time to either make a strong statement about retaining it or accept a sub-optimal bid
Aside from IRV there were two themes in the downwards moves yesterday. Firstly there was some retracement of stocks that have seen good support recently, G4S and Compass, and the moves were more likely just pattern of trading on the day. The moves are not indicative of a lack of support or any changes in views.
Secondly, the merchants, which seem to be getting only weak support. In the case of Travis Perkins its position as one of the lowest market capitalisations in the FTSE100 makes it vulnerable to demotion. But as no FTSE250 stocks is currently eligible for promotion that is not necessarily a concern. SIG’s activities are split roughly 50/50 between its UK and Euroland operations but the dip in sterling seems to have had a limited impact so far. The market remains concerned about the high operational gearing in Merchanting and the level of activity in Construction. Investors may be looking to the Autumn statement (23rd November) to see a boost to construction activity that will drive the shares. Our sense is that investors are wiser to bold statements from politicians that are not followed by the chequebook but there is often a knee jerk reaction to news that is not sustained. There are good reasons to be interested in the Merchants at current price levels, in particular their valuations though the prospective yields (SIG 4.2% and Travis Perkins at 3.0%) are low in relation to the risk of capital erosion.
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