Market Commentary - Housing, Infrastructure, Construction and Services
Berendsen and Foxtons provide new news today to guide investors. The former is in line with peers in terms of H1 performance with 7% growth in revenue and operating profit (3% at CER) and of the revenue growth around half seems to be organic; the concern discussed below is that UK flat linen showed revenue growth of just 2% and the margin was down by a third at 6%. The stock has had a good run recently and weakish news on the UK will probably affect it. Foxtons shows the most extreme example so far of the “Short term uncertain/Long term really great” in its half year numbers to end June 2016. The expansion into the suburbs was to be funded by a buoyant central London market but unfortunately the latter was in far from good health in Q2 hence the revenue was down 3% and EBITDA was down 36%. The Q1 numbers benefited from the Stamp Duty changes of course and so the dip in Q2 was expected. The company insist it will proceed with its plan to get 100 branches around London, up from 63 currently but anecdotal evidence suggests the suburbs are unsure of the Foxtons style. More below.
The moves yesterday were again positive for the interest rate sensitive sectors. Interserve rose another 3% to 303p, SIG 2% to 106p and Grafton by 1.7% to 564p. The notion raised a few days ago that the larger, internationally biased stocks might retrace a tad is emerging as Compass fell 2.2% and Berendsen by 1.4%. Capita was the hardest hit as it fell 4% to 935p. It is known to be struggling on some UK contracts, there was no mention of Avocis in the results statements and orders in the financial sector are slipping to the right for all players as Brexit clearly throws the established statements of systems requirements into substantial uncertainty. Companies will not spend on IT if what they want may change radically, depending on the Brexit terms. The part of the presentation we saw suggested also that process skills are high but creativity may be a casualty at present.
Rentokil gave a very good presentation but should face a little more interrogation. The organic growth was not split into volume and price effects and the conversation post meeting indicated that the dynamic nature of the services required made a split difficult; we can appreciate that but it is an important business dynamic that might be measured. The focus of the presentation on pest control was almost entirely on increasing sales and marketing and on Workwear it was all on cost efficiency. That may be the way management spends its time but a fuller explanation of the dynamics of all of the main parts of the operations will be useful. In raising the margin in the US from 11.8% in 2016 H1 to 20%++ levels achieved elsewhere (a stated aim of the top team) cost efficiency, other than just better overhead absorption, needs to be explained a little more fully as events evolve as it will be an essential part of the mix. RTO is becoming a great company, once again a real leader in its core market, pest control where it can see plenty of opportunity. It begs the question of course of what the diversification up to 2014 was all about and, in the case of Citylink why it was kept for so long!
Berendsen’s first half performance was as expected and the new CEO Jamie Drummond is making his mark on the business with additional investment and evolution of the successful operational approach of his predecessor. Net capital spend rose to £110m from £89m last year of which £29m was in new plant compared with £18m in the prior year. The UK flat linen outcome is said to be disappointing but few reasons are provided other than weak operational efficiencies which are being addressed and weaker volumes in the second half. The solutions appear to be more longer term than short term including addressing new segments and improving the levels of service. Elsewhere the business performed well. The company will benefit at the headline level from the fall in sterling, should X rates remain as they are and the expected EPS of 63p a share might be exceeded as 27p was achieved in 1H. Some may say the stock was priced for perfection at 1336p last night. While the news today does not provide too many concerns caution may be the mood today.
Foxton’s moves to expand across London were brave in the first place but the timing was not ideal, at arguably the peak or near peak of the cycle. Add in the Referendum outcome and Foxtons has been unlucky as well. It is realistic in its outlook indicating that it will be the end of the year at best before we see signs of higher levels of activity in the second hand residential market. Our sense is that may be optimistic and lettings revenue comprises near 50% of the total and in the suburbs rents have been wobbly for over six months as international transfers in the energy sector fell away and now the financial services sector will follow suit. The PRS sector may aid Foxtons but the rent per dwelling on those will not be premium and the buyers of its services will have strong purchasing power. Looking for read across from Foxton’s the company is as optimistic as it can be but notably confines comments of its experience over the last month or so since 24th June to its own self help and fails to comment on recent trends. The meeting this morning may yield more data on recent experience. Our sense is that read across from Foxtons is interesting but the specific issues of the company’s expansion programme need to be disentangled from the general market background.
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.