Market Commentary - Housing, Infrastructure, Construction and Services
Morgan Sindall and Travis Perkins have provided half year numbers today and Atkins a formal update on trading.
Morgan Sindall and Travis Perkins have provided half year numbers today and Atkins a formal update on trading. MGNS might have expected today to be an excellent one but for Brexit; the good news on trading in the first six months and the ending of the Faslane saga is great news bur the prospects in London Fit Out changed considerably on 24th June. The numbers this morning from MGNS, revenue unchanged but operating profit up 17%, dividend up 8% are very positive and the order book in Fit-Out is strong. The company has signalled that expectations for 2016 are a bit better than previously signalled. Travis Perkins had great plans to invest and use its economies of scale to good effect; the course appears to be unchanged but the company has today highlighted slight wobbles in demand pre and post 23rd June which has improved in recent weeks. TPK showed L4L sales up 3.1% in the first six months, 5.8% at headline level and adjusted operating profit was 4.9% higher so margins slipped a tad but not in a material way. Atkins has issued a short trading statement, as befits the short period since end March, in which its states that trading is in line with expectations and while there is continued uncertainty in some markets it is adapting to the situation and key projects are progressing.
Brexit watch; The companies reporting this morning continue with the theme that it is too early to tell the impact of Brexit but so far it does not feel too bad. Travis Perkins was affected a bit more than the average reading its statement but that might also be the main housebuilders slowing down at their half year ends as they had done all they needed to achieve by early June and are now ramping up again. Industry sources in the North of England indicate that activity is still very strong a view consistent with that of Morgan Sindall expressed to us this morning. It may be that for now the inevitable cyclical slow down in London has coincided with Brexit to exaggerate the position. But as everyone says it still too early.
The moves yesterday provide limited information regarding future price action. Mears rose 1.3% to be the best riser and Homeserve dipped 2.3% to be the largest faller. The only five risers in the 22 bell weather stocks that are the most influential in HICS that we cover were ones really unaffected by Brexit. (Mears, Berendsen, Compass, Babcock and Rentokil)
The macro factors are guiding the market and the main trends within HICS stocks. The big one that is starting to be factored in is the prospect of a Trump victory in the US election. We have no brief as such to comment on big political issues. But right now the prospect that US consumers might “Hunker Down” soon and stop spending is quite frightening as there is not much that monetary or fiscal policy can to affect the situation. We will not know the answer until November and that is a long way off in Stock Market terms and it will impact on UK based HICS stocks. The first US election profit warning has yet to happen and most likely it will be in consumer durables, including housing.
The correlation in sentiment between US housing stocks and UK ones is high and there is sufficient concern about the UK end on its own to raise some alarm bells, even at today’s relatively low levels. Fast growth in the US has been a mainstay for Compass and Wolseley in recent years and weak trading in Q3 might take the edge off those stocks. Babcock might also be affected as US spend dips on aviation (Avincis) and the market takes frit at Trump’s views on supporting NATO and the States that border with Russia with military backing.
Morgan Sindall has turned the corner and is now rid of all major legacy issues and is working on the higher quality projects it has strived to achieve for several year, hence revenue is stable in the first half but profitability substantially improved. We expect that forecasts will increase a little for 2016 from c 75p of EPS given the strong first half but remain cautious about the rate of further growth in 2017 just because uncertainty has risen. The order book was 11% higherat end June 2016 than at the same time last year with a 91% rise in Property Services which has achieved profitability a little earlier than expected. It has been an excellent first half for MGNS and we look forward to the meeting at 9am.
Travis Perkins has it analyst meeting at 11am and there are a lot of moving parts about which to ask questions and form a view. The headline is that the strategy remains 100% intact but there are some extra wobbles along the way caused by Brexit. At least the challenging conditions in Plumbing and Heating seem to have abated slightly in the first half as a whole with L4L sales growth in the period up 0.4% and the branch restructuring programme has continued; margins are down a tad in P&H which will need some explanation. The operating margin in general Merchanting hit 10% in the period which is an excellent performance and will prove to management and shareholders that the strategy is working (9.6% excl property profits versus 9.4% last year. Overall it was a good first half for TPK despite the slippage in demand towards the end of June and we await news on the expansion programme’s future progress and whether the pace has changed.
Atkins has said little today that is new but it has made a very good start to the year and the share price recently has been reflecting that and the impact of recent large scale acquisition PT&T. Clearly delays in the 3Hs (Heathrow, Hinkley and HS2) are not helping but by all accounts design and preparatory work is continuing in the absence of any big decisions. The otehr main piece of good news is that the US operations have made a good start to the year as margin improvement there is a priority. ATK is on track for c 115p-120p of EPS this year (depending on X rates) and the news this morning confirms that.
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