Market Commentary - Housing, Infrastructure, Construction and Services - 7th November 2016
The only relevant news today is from JLIF, the infrastructure investment company, which indicates that its good progress continues. The upward moves on Friday last gave no real indications of future developments.The downwards moves tell us more about the future as half of the 22 stocks in our universe fell by more than 2%.
The only relevant news today is from JLIF, the infrastructure investment company, which indicates that its good progress continues. The NAV per share rose by 7.8% in the nine months to end September to 116.9p versus a share price at close on Friday of 127.2p, at which the current yield is 5.4%. The main important issue is that the company continues to find investment grade assets that are attractive. The growth was better than expected due to several factors including coat saving and disposal profits that were only partially offset by lower than expected inflation, a change in assumptions on deposit rates and some cost provisions. The Infra Cos are becoming a more widely understood asset class but are still somewhat in their infancy as quoted vehicles. The solidity of their earnings and the prospects for growth via an increased adoption of PFI/PPP type funding structures should increase the attractiveness of them in the future and that of JLIF, as one of the most proven performers. The read across for other Infra Cos and Balfour Beatty is positive
The Times tells us that this week we can expect a trading update from Tyman tomorrow; on Wednesday Workspace has its Interims and Redrow an AGM; on Thursday Grafton is scheduled to update us in a trading statement and on Friday Galliford Try has its AGM. Of that group both Grafton and Galliford Try have taken a harsh bashing in recent months. The former did not help itself with an unexpected £20m restructure charge at its interims but as others have followed its lead it has become clearer that a step change in the approach to the plumbing and heating market in the UL is needed. Grafton enjoyed a few positive days last week but at 523p is still good value, in our view. GFDR is subject to the wild swings in sentiment on the housebuilders which were generally three steps back, two forward in October. There is some stability creeping in though it’s at valuations that are much lower levels than in recent years; prospective p/e for Galliford is 8.1x. Unfortunately for GFRD it’s a sector not a company call and while it has earnings growth in partnership housing and construction its main bread and butter is from housebuilding. We expect that housebuilders will get lukewarm support only until the interest and Brexit positions are clearer. We have few doubts that Redrow will show a very positive picture later this week but if it, like Persimmon, is slowing land buying then the signal will be obvious.
The upward moves on Friday last gave no real indications of future developments. Berendsen was the best riser, up just 1.0% to 949p. While there may be relief that the profit warning impact on the price has reversed there is no evidence that it is substantial or sustainable; we think the company has to do a lot more to regain its credibility. Investors were finding it difficult late last week to pay high valuations though that may alter this week depending on US election progress.
The downwards moves tell us more about the future as half of the 22 stocks in our universe fell by more than 2%. Irrespective of individual investors views on Brexit the current extreme views on how democracy might work in the UK and the separation of power between Executive and Judiciary was scary for the markets. Equally though the improvement in sterling did not aid some stocks. BUT the main reaction was seen in construction related stocks falling as Brexit is seen as a bad thing for the economy and there are few over ready projects even if the government does decide to open the cheque book. Carillion was the main loser, down 4.5% to 243p followed by Kier (-4.0%), Balfour Beatty (-3.5%), and Morgan Sindall (3.4%). Costain was down 2.5%. Our discussions with these companies suggests that current trading and order intake is good and examples such as Severfield’s new work last week is evidence. The market is however looking 18-24 months ahead and sees investment orders from UK industry falling and consumers maxing out on debt. The companies see little evidence in their order book as yet. So the current levels of share prices in the sector represent a buying opportunity, in our view, for all five stocks mentioned.
Moves last week
The sector struggled to make headway last week partially because sterling improved, wiping away a small portion of the “benefits” of Brexit. The market fell by around 4% and so did the HICS stocks, though for choice the HICS decline was nearer 3.5%. The All Share is now up around 6% YTD whereas the HICS stocks are down by around 4%, ex CRH, which is a special case.
G4S was the strongest performer last week, up 10% as its update was well received and Big Broker started to realise that the company has a lot going for it after all. We have been solid supporters of the investment case since meeting management three years ago but that has been tested severely by the stock falling from the 300p level to 173p at one stage in June this year but has now bounced back strongly. Our sense is that 300p is a suitable target price and many brokers are moving to that level.
Compass was the largest loser last week, falling 5.6% to 1392p. It may be that there are some nerves ahead of its results which will be released on 22nd November. The rating at around 23x p/e is perhaps too high for some. The other concern may be that there is a change at CEO level due soon as Richard Cousins has been in post for 10 years and has prepared for life after Compass with a NED role at Tesco and an advisory role at Lancaster University. The main gains have been made in Compass (margins and share price) so the hard annual grind of getting 3-5% organic growth and maintaining margins at 7.5-8.0% is the path from here. Shareholders will benefit from solid yields (now 2.3%) and the buyback programme. But that may not suit all investors so sentiment could vary from here onwards
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