Market Commentary - Housing, Infrastructure, Construction and Services 8th February 2017
Atkins and Grainger with planned trading updates and Redrow with its half year results provide new information this morning. The big move yesterday was at Berendsen which finally came to life with a 6.9% rise to 904p, its first close above 900p since mid November.A few HICS sector stocks fell yesterday but none by more than 0.2% on what was relatively good day for the sector
Atkins and Grainger with planned trading updates and Redrow with its half year results provide new information this morning. Atkin’s news contains familiar themes in terms of each division and the group is trading in line with expectations. Grainger’s update is positive as the company shifts to being a mainly UK PRS owner and operator. The statement is very positive about the White Paper’s intentions, none of which have not been previously reported. Our sense, however, is that Grainger’s strategy is not wholly dependent on legislative changes and is therefore robust. Redrow’s numbers show no evidence of the Government’s allegations of landbanking with legal completions up by 13% to 2,459 units in the six months to end December and ASP up by 12% to £344,000 thereby aiding revenue to rise by 23% to £739m. Redrow’s consistent theme has been the slowness with which it gets implementable planning consents, an issue which is on the wish list of outcomes in the White Paper released yesterday but with little realistic change in process. More below.
The big move yesterday was at Berendsen which finally came to life with a 6.9% rise to 904p, its first close above 900p since mid-November. The profit warning which triggered the massive share price decline from 1337p in July last year was more notable for being a surprise in what was previously thought to be a sensibly operated business. The warning reduced PBT guidance by less than 10% for last year but the reason did just not wish with investors. That and the substantial gains in the previous five years was probably the signal to take profits while the new top team settled down. EPS of 63p is expected for last year and 69p for this year so the rating is not low, even now but the growth prospects are not as good as previously expected. The impact of the Rentokil/Haniel deal are not yet known, but even so 13x prospective p/e looks a tad harsh.
A few HICS sector stocks fell yesterday but none by more than 0.2% on what was relatively good day for the sector. The housebuilders regained some of the previous day’s losses. That will come as no surprise following the publication of the Housing White Paper which is not seen as damaging for the mainstream, quoted, dwelling creators.
Press comment on the intended measures in “Fixing Britain’s Broken Housing market” will be plentiful so little need to add much to it. The government’s intentions are clear but the commercial incentives to join the dots in the planning, labour and material supply and funding chains cannot be “dictated” by White Papers that easily, as all past attempts have demonstrated. There is nothing in the intended measures announced yesterday that suggests a different outcome this time. But, we have to say that a 5-10% rise in completions would, in the current climate, have a very positive impact on operational gearing. There is a long period from flash to bang with White Papers, especially in housing and the bangs are rarely noticeable. The eventual out-turn may be disappointing for the Paper’s proponents but even some change in the volume of production will be positive for share prices.
Atkin’s has a conference call at 8am to which we shall dial in. The geographic themes in the update this morning are familiar with the UK doing very well, the US picking up strongly with improved margins, the Middle east struggling a bit due to lack of demand and AsiaPac stable. The energy operations are now more focussed on nuclear than had previously been the case, due to acquisitions and contract wins. It is probably in better shape now than we have seen since the fall in the price of crude oil in $ terms and there is a hint that it might turn for better as prices are now stable. We are told in a very short sentence that the group’s balance sheet remains strong and provided with no evidence; mentioning the area in that way is a red flag to some, so there may be questions later, especially around working capital and the pension deficit. EPS for this year will be a short 120p, boosted by the acquisitions and by FX for the last nine months of the financial year. At 1479p the shares are not expensive, in our view. No mention of deals with CH2M as might be expected!
Redrow’s progress since the return of founder Steve Morgan has been substantial. The revenue improvement outlined above created a 35% increase in PBT to £140m. The operating margin at 19.5% for the period is a tad lower than rivals and in updated guidance for 2019 is expected to remain at that level as revenue rises to near £2bn and EPS to 77p. The new guidance is a bold move in the uncertain post Brexit situation but as we know the UK economy seems so far to be unaffected. The 50% increase in the dividend at the halfway stage to 6p will be welcomed as Redrow’s yield is much lower than its rivals, balanced of course by its faster than average growth. The scene is set for the company to continue to grow with the current land bank up by 18% to 25,300 units and the order book up 35%; net debt has reduced substantially to £56m from £139m this time last year so the financial capacity to grow is good. Since the period end the company acquired Radleigh Homes which provides a further 2,500 actual and potential plots. If the company can reach 77p of EPS by 2018/19, and we believe it can then the shares at 452p at close last night look cheap.
Views on the housing market depend on many factors of course but some of the opinion needs to be guided on where investors believe we are in the “Recovery-Boom-Bust” pattern typical of the post war era. There is no doubt that house price to income ratios are stretched in some areas, especially in Central London pointing to the recovery having happened and being in the Boom phase. But for most the 85% on the UK population that live outside the M25 area we are still in the recovery stage and possibly not much of the way in. So for the housebuilders who have spotted the trends and Redrow is adept at that, there is every reason to believe that there are several more years of strong activity ahead.
Grainger has bet its future on PRS and that is probably a very good thing. It will invest £850m in new stock between now and 2020. It has a newly strengthened board that includes Mark Clare, ex Barratts and Justin Read, ex Segro (and Hanson and Speedy Hire). The last five years have been a frustrating period for the company’s investors but the share price is now starting to respond to the intrinsic value in the business and is y up 12% at close last night on the early December level. The release today is full of praise for yesterday’s White Paper and the beneficial effect it will have on Grainger’s business model. The results for the next few years will of course still be dependent on the reversionary which is benefitting from increased property values and a 4.2% rise in rental income on an annualised basis. Notable also is the improvement in operating performance and overhead costs as well as a lower coupon on borrowings. We do not cover Grainger in detail but as outsiders it is looking to be in increasingly better shape.
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