Market Commentary - Housing, Infrastructure, Construction and Services - 8th November 2016
Tyman is the only contributor to company news this morning. In an update it says that trading is in line though the pattern of developments is varied in each market. The key issue for the sector is what is going on the ground. The conclusions from the data indicated below are that the risks are a tad more downwards than they were. Industry leaders e talk with remain optimistic and enquiries remain at good levels but as might be expected in the current climate the views and the data point to caution, with imported inflation in the form of energy, input and finished goods costs probably being the biggest short term issue.
Tyman is the only contributor to company news this morning. In an update it says that trading is in line though the pattern of developments is varied in each market. The statement is notable for is almost complete lack of numbers save for the mention of net debt falling to just below 2.0x EBITDA by the year end from 2.35x following the Bilco acquisition. Clearly the reported numbers will benefit from FX and the company has increased revenue and margin through self help initiatives, we are told, that include pricing actions and cost reductions. In terms of markets a quick flip around the geographies shows UK and US flat, Euroland with some growth in 1H that levelled off in Q3 and the Rest of the World on balance flat. So the story is going to be about self help and in the UK the company is prepared for flat markets in 2017 and has new products to offer and is looking at its distribution. Chairman Jamie Pike is stepping down due to other commitments (he is chair at RPC and Ibstock as well as a NED at Spirax-Sarco). The market expects EPS of around 22p this year and 24p next though both numbers might be higher if FX rates stay unchanged. So at 263p at close last night the stock trades on 12x p/e.
The key issue for the sector is what is going on the ground. The conclusions from the data indicated below are that the risks are a tad more downwards than they were. Industry leaders e talk with remain optimistic and enquiries remain at good levels but as might be expected in the current climate the views and the data point to caution, with imported inflation in the form of energy, input and finished goods costs probably being the biggest short term issue.
• RIBA data show future workload trends stabilised in September. Large practices were the least optimistic about increasing staffing levels. A small number of practices reported a Brecit related slow-down in projects , with some cancellations. The CPA report that most of its members have seen orders and enquiry balances at the lowest level for two years. So while activity grew in Q3 for the 14th consecutive quarter the outlook is less clear. Our discussions with companies indicates demand remains at high levels but management teams are cautious.
• Inflation in imported materials is rising. Tyman mention today that the landed cost of much of its product sold in the UK has risen but has been recovered via pricing and surcharges. CPA data show that in Q3 material costs rose for roughly two thirds of contractors and engineers. Merchants are usually happy to see some inflation as the stuff in the yard becomes more valuable but that also requires them to be fast in their feet in pricing and the working capital burden can rise as the new stuff is dearer. As recent updates indicated each Merchant has a different mix and hedging situation so the consequences will take time to work through. New build residential is likely to be the first area affected.
• The house price data from Halifax and Nationwide show slightly different pictures but both indicate a moderation in house price increases, on an annual basis as affordability starts to bite. Halifax showed that prices rose 1.4% in October, faster than expected but the 5.2% rise in the three months to end October is much lower than teh 10% seen in the period to end March. Nationwide showed flat pricing in October and a 4.6% rise in the prior 12 months
• CPA members also report skills shortages among the trades. Between 40% and 55% reported a lack of brickies, chippies and plasterers, with the former in particularly short supply. This is music to the ears of the offsite segment.
Yesterday was one for a bit of risk taking as stocks under pressure recently and with chequered history bounced back. Interserve closed at 335p, up 3.5% and was the leader and Capita was up 3.33% to 588p. Both have been touted as potential candidates for an equity issue but clearly such fears subsided yesterday and in our view are over stated. Both have cashflow prospects that are good enough to avoid their balance sheets being overstretched in the short/mid term, though dividend increases are likely to be on hold.
Only two stocks in our universe of 22 fell yesterday, Serco was down 0.3% to 138p and Morgan Sindall fell 1.2% to 696p on just 11,921 shares traded. MGNS has not had the boost its upbeat trading statement justified. It may be that it is just thinly traded and the story is not getting to a wide audience. The company has generally had a contented investor base and 17% is still in the hands of the founders, John Morgan and Jack Lovell; the former recent £3m investment in shares in the company took his stake back to c 10%. We expect the company to deliver EPS of at least 78p this year and can easily construct a case for over 100p by 2018 based on margins drifting nearer to industry averages. Dividend payments are likely to show generous rises, in our view though with a new Chairman in place there is no guarantee. In a climate where third party analyst coverage is falling off a cliff MGNS might need more activity to get noticed.
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