Market Commentary - Housing, Infrastructure, Construction and Services
Plenty of news to guide us today and most of it is positive. Compass and Countryside have issued trading updates and Rentokil released its half-year results to end June 2016. The mood switch was back again yesterday as despite poor construction sector data from the ONS in Q2 Interserve (up 7.6%), Kier (up 5.5%) and Galliford Try (up 4.2%) led the way. The reports from Taylor Wimpey (up 6.8% on the day) were positive. There is good reason to think that the mood will ebb and flow over the summer but if the trend to a soft landing from Brexit (or the momentum for Breverse gathers pace) continues then the cyclical stocks that have taken such a hit recently should continue to climb.
Plenty of news to guide us today and most of it is positive. Compass and Countryside have issued trading updates and Rentokil released its half-year results to end June 2016. The story at Compass remains unchanged and is solid with organic revenue growth of 5.6% at CER; at current FX rates revenue would have been £700m higher last year and operating profit £60m higher. Countryside seems quite chirpy as the referendum has so far had little impact and it is positive about the full-year outcome. It told us that while cancellation rates rose from 24 June in recent weeks the rate has slipped back to a more usual level and the cancelled product has re-sold often at higher prices. Countrywide’s half-year release provides a slight reality check on Countryside’s optimism Rentokil’s half-year numbers are in line and show steady progress. Revenue at CER is up 10.6% and up 2.5% on an organic basis with pest control up 5.5% and it is now over 50% of group revenue. Operating margins for the group as a whole increased slightly to 11.7%. More below.
The mood switch was back again yesterday as despite poor construction sector data from the ONS in Q2 Interserve (up 7.6%), Kier (up 5.5%) and Galliford Try (up 4.2% ) led the way. The reports from Taylor Wimpey (up 6.8% on the day) were positive. We watched the TW webcast and they told it as they saw it, which was 100% fair and reasonable. Their experience is that very few metrics as adverse, so far and those that have become weaker they are still within the “permitted” range. There is good reason to think that the mood will ebb and flow over the summer but if the trend to a soft landing from Brexit (or the momentum for Breverse gathers pace) continues then the cyclical stocks that have taken such a hit recently should continue to climb.
The losers yesterday were the stocks that have seen strong support recently, including Compass down 0.8%. The message about future price action on the international companies that have seen strong support recently is that valuations might be quite full. RTO had some very good news yesterday but at 211p is rated at around 21x p/e for teh current year which is at the top end of the peer group range. The market cap at £3.9m is creating a louder knock on the door of the FTSE100 but is still someway short of certain entry, at least for now.
Rentokil’s operations should be substantially unaltered by Brexit and the share price has demonstrated that in recent weeks. The companies prominent statement that pest control is now 50%+ of group revenue and that North America accounts for over 30% of sales tells us something of the direction of travel! It will be of little surprise that the company claim that conditions in North America are positive and in Europe they remain challenging, especially in France and Benelux. Shareholders will appreciate the 13.8% rise in the dividend. Looking across the information released today there is little to be concerned about. The company has made 21 acquisitions in the first half but seems to have an effective “machine” to identify and, buy and integrate the deals. The strategy and allocation of resources is unchanged the only real question being whether or rather when it might sell the Workwear operations, which showed 1.8% decline in revenue in the first six months. The company indicates that it is focused on the quality of earnings in Workwear but for the right offer we expect it would rather focus on Pest and Hygiene. The analysts meeting is at 9.15 and we shall attend and look forward to the more detailed explanations of strategy implementation and of the Hi-Tech pest control JV announced yesterday. EPS at the half way stage hit 3.7p, up 17% on last year at AER (10% at CER) and would therefore seem to be on track for 10p at least for the full year, depending on X rates.
There is little to concern investors at Compass as the geographic diversity and the momentum provide by the top team continues. It has again given prominence to its MAP tools for performance improvement and while five years ago the principal use was in cost and efficiency the main use now appears to be in revenue growth. Given the amount of good stuff going on its perhaps churlish to identify weaknesses but there are some, the most notable being the troubles in serving the resources sector. The company is restructuring in that area and the cost of that will reduce operating margin by 10bps from a level which is otherwise unchanged, Restructuring costs are a normal part of business though sometimes they can be much higher than normal. Compass is highlighting the facts not seeking mitigation. What is of concern perhaps is that margin improvement has stalled and looking across at the margins of rivals there are few reasons to believe they will rise substantially from this point. Areas in FM outside Catering do not typically attract higher margins than food. The company is on track for 58p of EPS this year, possibly higher depending on the strength and duration of FX rate tailwinds.
Countryside’s observations on the post referendum reaction are part of the basis for its confidence in the full year outcome, the other part of the strong first half which showed completions up 29% to 583 units and ASP 7% higher at £348,000. The other metrics released today show the company to be on track; sales outlets rose by 37%, the landbank is 4% higher at 27,115 plots of which 14,703 have planning permission and the sales rate at 0.76 homes sold per site per week remains above the sector average. The story so far for the housebuilders seems to be intact and with much government support for the sector it may continue. The real concern is the strength of the chains that support house buying if the second hand segment stutters. Countrywide provides some early clues in that regard in its update today (six months interims to end June) in which it is altogether more cautious and saw a dip in activity ahead of the Referendum and has seem a slow down in Central London residential transactions since 24 June.
Whether we can shrug off Brexit or we are in a “Phoney War” period that will see the true picture start to emerge in the Autumn has yet to be seen. Recruitment data suggests that the picture by September may be less rosy than it is now but there may be other events!
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.