Market Commentary - Housing, Infrastructure, Construction and Services
Market Commentary - Housing, Infrastructure, Construction and Services
New trading data this morning comes from Keller and Waterman and Galliford Try has confirmed a change in the board. Breedon has also confirmed last week’s news that the Hope acquisition has completed. The erratic pattern of stock moves is likely to be the norm for the next few months as the impact of the advisory referendum results are absorbed. The process of how Brexit will be achieved with the EU and within the UK democratic structure is not clear let alone the terms so uncertainty will remain. Actions this week by the BoE to support the level of activity in the economy will create some “noise” in the system of detecting Brexit effects. Depending on the accompanying statement any action by the BoE will most likely be taken as evidence that there is a slowdown on the way, which may have happened anyway, the pace of which is accelerated by the outcome of the advisory referendum. The ONS data showed that construction is in recession and we know that the “Three Hs”, Hinkley, Heathrow and HS2 are still being kicked into the long grass which is unhelpful for Construction
New trading data this morning comes from Keller and Waterman and Galliford Try has confirmed a change in the board. Breedon has also confirmed last week’s news that the Hope acquisition has completed. Keller’s half year numbers show 9% revenue growth in revenue and a 10% fall in operating profit at CER. The story is that the £5m operating profit in the Australia Pacific (APAC) region at the halfway stage last year turned into a £10m loss this year which was more than enough to offset improved performances in the US and Europe/Middle East. The read across from Keller is positive for other stocks but Keller may suffer today as the loss in APAC is bigger than expected as per the signals in the 24th May update. Waterman has updated and tell us that it has done rather better than its target of doubling annual PBT to over £3.3m by June 2016 and add that they have not seen any real change since 24th June. GFRD has confirmed that Ken Gillespie has stood down from the board and his role in charge of Construction and Infrastructure and that Bill Hocking takes over the operational role but it is not mentioned whether Bill goes onto the board
The half year reporting cycle will cause an increase in new financial news this week with Travis Perkins, Morgan Sindall, LSL Property and the tiddler in trouble T Clarke providing half year numbers tomorrow along with an update from WS Atkins; on Thursday Serco has its half year number anouncement.
The erratic pattern of stock moves is likely to be the norm for the next few months as the impact of the advisory referendum results are absorbed. The process of how Brexit will be achieved with the EU and within the UK democratic structure is not clear let alone the terms so uncertainty will remain. Capita saw a bounce back rising 2.6% on Friday last to close at 960p. Weekend reports of another troubled contract at Capita may hold back the stock today and industry reports tell us that the company rarely achieves its promised performance levels when assuming a new contract but it’s often too late by the time that is evident! Mitie rose 2.5% on Friday to 249p and lacks sustained support. Berendsen was the largest loser on Friday, down 4.6% to 1275p as its results failed to excite; arguably the stock was priced for perfection pre results and it fell slightly short of expectations especially in one segment, UK flat linen.
Brexit Watch. Keller warn of a Q4 possible slowdown in its UK operations and Waterman say it’s still very early to tell what the impact may be but enquiry levels remain positive. Actions this week by the BoE to support the level of activity in the economy will create some “noise” in the system of detecting Brexit effects. Depending on the accompanying statement any action by the BoE will most likely be taken as evidence that there is a slowdown on the way, which may have happened anyway, the pace of which is accelerated by the outcome of the advisory referendum. The ONS data showed that construction is in recession and we know that the “Three Hs”, Hinkley, Heathrow and HS2 are still being kicked into the long grass which is unhelpful for Construction. Reports that Parliament may have a strong view on Remain may add to short term confusion and on 5th September the petition for a re-run (set up by a Leaver in late May fearful of a Remain majority) will be discussed formally.
Keller has shown for the second time in recent years that it struggles with projects and operations in Asia Pacific. The difficulties there will no doubt overshadow good performance elsewhere. The dip in the resources sector is no doubt a contributory factor to the weak APAC result and many will believe the company when it tells us that the second half will be much better than the first. What investors will find difficult is that the number is worse than expected and the management issue that emerged four years ago in APAC has occurred again. The frustration for management is that on other metrics the performance is good, with margins up to 7.2% in the US, from 6.8% last year and 5.2% in Europe Middle East and and Africa (EMEA) from 3.3%. Operating cash conversion at 125% is positive and the 12 month order book is 10% higher than at this time last year. We do not cover Keller but watch for read across. The conclusions today are firstly that early stage activity remains strong, with a good performance even in some Euroland countries and secondly that the further the operations are from HQ the harder they are to control.
Waterman tell us very little new this morning so much further comment is not needed. The company has done well to pull itself up by its bootstraps in recent years after the activist Peter Gyllenhamer gave the board a shock. The sense we get is that read across to other UK consultants is positive.
The news from Galliford and Breedon is no more than confirmation of existing information. The departure of Ken Gillespie has probably not been taken that well by the market but there are so many other factors affecting GFRD’s share price picking on that factor would be misleading. Breedon’s £336m acquisition of Hope materials is a good piece of business for shareholders though arguably the timing is not ideal. Breedon’s geographic spread throughout the UK and its dependence on some key long term projects, such as the roads in NE Scotland will sustain performance many believe. The main concern has to be that cement manufacture is new to the group and a very different process than creating and selling aggregates as well as a business that requires substantial technical input. History tells us not to underestimate Breedon’s top team.
Last Week’s Moves
The sector performed well last week, up around 1.5% versus the market up 0.2%. YTD the sector is up by 3% (with Housing down 2%) and the market is up 7.7% (FTSE100) / 6.1% (All Share).
The main trend last week was for the cyclical, interest rate dependent stocks to bounce little, perhaps in anticipation of some monetary easing this week. Interserve rose 6.1% from a low base and the Merchants did well with all four rising by more than 3% though Grafton, SIG and Travis Perkins all remain more than 20% down YTD.
The internationally focussed services stocks suffered a little last week with Berendsen falling 3.4%, Capita by 2.0% and Compass by 1.8%. RTO managed to avoid the general trend with a very good set of results and a strong argument that it will double the margin in its largest operation, pest control in the USA.
There are good reasons to believe that the valuations on the internationally exposed services stocks can be maintained. Further gains will be dependent on trading news will be the general view. The outlook for the cyclically exposed stocks remains more uncertain as news on interest rates develops. It’s easier to mount an argument for caution at this stage than one to be bullish but therein lies opportunity! Carillion, Costain and Balfour Beatty have all adapted the way they operate to have limited exposure to commercial and regional construction cycles over the last five years and should be much less affected by a dip in overall UK activity than the current share prices suggest, in our view.
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