Market Commentary - Housing, Infrastructure, Construction and Services - 9th November 2016
Mmmmmm. Clearly the Macro will dominate today and you will be deluged with facts and opinions about what may happen with Trump in charge. The essential nature of much of the output in the HICS area should make it a relatively safe haven. Redrow and Workspace have news this morning, the former an AGM update and the latter its interims. Both provide us with positive news and a rosy outlook, as they see it.
Mmmmmm. Clearly the Macro will dominate today and you will be deluged with facts and opinions about what may happen with Trump in charge. The essential nature of much of the output in the HICS area should make it a relatively safe haven. But the mix of factors is complex, as we know, overshadowed by the prospect of slower growth if protectionism increase. But nations and companies do not shrink to greatness, so making America great again means growth. On that thought we shall return to our narrower brief.
In the short term of course the UK companies that have benefitted from a US$ FX tailwind may find their sails partly deflated this morning. Rentokil, Compass, Wolsleley and G4S are in that group, especially the first three.
Redrow and Workspace have news this morning, the former an AGM update and the latter its interims. Both are very positive about recent trading and express highly positive views of future performance. Redrow’s main evidence is a private order book up 29% on last year after just over four months of the current trading year, ASP up 6%, and net debt now at £92m; the last point reduces one of the key blockers on Redrow’s valuation versus rivals. The company tell us management is confident of delivering another strong year of progress in 16/17 Workspace is so confident it has increased the dividend by 40%. In the first half rental income was up 6%, trading profit (adjusted, after interest) is up 16% and the L4L rent roll is up 5.5% with occupancy 0.3% higher at 90.3%. The company does provide a nod to the uncertainty created by Brexit but balances that with a soothing assurance about its long term prospects and resilience of its customers. More below.
Atkins was the best riser yesterday, up 2.0% to 1560p. The case for ATK is still strong at this level but of course the tailwind of currency will not help it in the US, though exposure to oil and energy is likely to be positive. Wolseley and Compass were both up around 1% yesterday, a feat that will not be repeated today we suspect given FX and uncertainty.
Interserve was the back marker (again) down 3.3% and it seems increasingly likely that in smoke filled rooms it is negotiating some additional funding, most likely it started with debt but share price is flashing to us that it may have progressed to equity. The company promised and update in mid November, the date for which is not yet fixed, also suggesting activity in the background. Best avoided even at this level though we believe the company has some good contracts and good prospects. The Glasgow energy to waste though may be a bigger drag on statutory earnings and cash than the initial £70m hit.
Back to Redrow and the housebuilders in general. There is a distinct lack of stock in the market at a time when the sons and daughters of the post war baby boomers are expanding their families, population is rising, mortgages are cheap and available and employment is high. The last two factors might fade and forecasts for 2017 & 2018 are dipping for the sub sector and if immigration slows population growth may slow. We say may because, as Queen Theresa is finding, there is a contradiction in a country being open for trade but not open for people, which is going to be tough to balance. Redrow has reduced exposure to London and increased its build levels in the regions; its timing was pretty good. The lower net debt is encouraging but may be an outcome of lower land spend, on which we are given no new data by Redrow. The company is expected to deliver around 55p of EPS this year and next, forecasts for the current year may rise on today’s news. At or near the top of the cycle housebuilders historically traded on 8-10x p/e. So at 387p at close last night the company is on 7x prospective. Given also that historic p/e valuations do not reflect the much improved balance sheet structure of the housebuilders the valuation on Redrow appears harsh.
Workspace always provides a good read across to the property sector and the housebuilders. On the first point the high level of demand it says it is experiencing is good for the sector and the M25 economy in general. On the second issue it makes no specific comment on the market for its development projects but it sold three residential redevelopments in October at valuations higher than those indicated in March.
In conclusion both Redrow and Workspace provide us with positive news and a rosy outlook as they see it. Is there an elephant in the room they are missing. Our sense is that while they are positive, there is an underlying element of caution and warnings from RIBA on demand for space and rising inflation, more so at Workspace than Redrow.
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