Market Commentary - Housing, Infrastructure, Construction and Services
There is no directly relevant news this morning from our core HICS stocks. We attended the result meetings for Morgan Sindall and Travis Perkins yesterday and report below along with a comment on Lakehouse, which issued a further profit warning yesterday
There is no directly relevant news this morning from our core HICS stocks. We missed the Lakehouse profit warning yesterday due to time requirements. It announced a further £4m of write-offs in its regeneration operations but the pill was sugar coated with a new £37m contract from Scottish Power for the installation of 450,000 smart meters over the next five years. New Chairman Bob Holt has reassured that the company is taking the necessary steps to stabilise the business and in the Energy operations reduce dependence on selling Carbon Credits which has been subject to substantial legislative change and uncertainty. More below.
Morgan Sindall was the best performer yesterday rising 7.1% to 611p. The company was very positive about its prospects at the results meeting and had signalled in the 7am statement that it was likely to beat current expectations this year. The meeting provided a little more colour to help justify management’s confidence, especially in its Fit Out operation not only for 2016 but also the mid term.
MGNS has more to gain than most peers from getting margins to industry average levels. We estimate that operating profit of £30m+, rather than the £18m achieved, on revenue of £1.2bn in the first six months would be possible with industry average margins. The company has assured that it has in place much more rigid risk measurement and management processes which we think should allow it to get close to industry “norms” for profitability.
The other key element of yesterday’s meeting was that the Faslane nuclear berthing dock project dispute is finally agreed; that not only clears the last of four substantial legacy issues but also, we suspect allows it to establish a stronger relationship with MoD, which is already a client but has substantial projects of interest to MGNS.
Atkins also had a strong performance yesterday rising 2.1% to 1424p as its update reassured the market. The only other sector stocks with a positive performance were Rentokil and Polypipe.
Interserve showed the largest decline falling 3.6% to 278p. It has an opportunity to gain support with its half year results which are due on 10th August. The intended sale of the Equipment Hire operations is still proceeding and may be completed soon but we are not sure that an adequate offer will be made, in the current climate. With the market expecting c 65p of EPS this year, assuming Hire as a continuing operation, external confidence in the company is low.
We attended the Travis Perkins meeting yesterday. The shares fell by 0.7% to 1534p yesterday which is well below its pre 24th June level of around 1900p despite assurances that the Brexit impact is subdued so far. The company went a little further than some rivals by indicating that it has seen some projects subject to deferral in the last few week but none have been cancelled. The company is continuing with its major overhaul and is around halfway through the process; continuation of the programme is justified by the results to date and the fact that it remains affordable. Around £600m will eventually be invested in IT, Marketing, property and other initiatives which allow the company to gain UK market share, taking fuller advantage of its scale. The meeting covered several areas in detail but raised no specific issues of concern. As was stated the top team has experienced many different types of conditions in its markets over many years; the current market conditions are not that tough and the signals so far from the data the company uses to guide future sales are robust. The merchanting industry is very fast moving both at the supply and sales levels and that is often misunderstood externally. Consensus forecasts of c 145p of EPS this year (58.4p at the half way stage, up 8%) may look a little on the high side right now but the out-turn should be well ahead of last year’s 130p level.
Lakehouse has had a very troubled time since coming to the market and arguably should not have been floated. There have been several “Buy and Build” vehicles in the sector and the history does not look promising. Inspace quickly came and went, Connaught tried to grow too fast and Spice was a problem. The history of companies dependent on energy “subsidies” is also poor; Eaga was a failure and others have dabbled in energy saving area such as Kier only to find the rules altered wiping out any prospect of success. Having said that Mears has succeeded by understanding its markets well to deliver organic growth and buying carefully in areas that extend its geography and service range. Lakehouse provides Regeneration, Compliance, Construction and Energy Services. New Chairman Bob Holt, founder of Mears, knows these areas well. The service are in high levels of demand in the UK. We suspect there is still a great deal of work to do at Lakehouse to get the company back to a stable position. The contract with Scottish Power announced yesterday is a very useful contribution; we have our doubts about the roll out of the Smart meter programme but in any event in Scottish Power’s geography the 450,000 units in the contract will be close to the expected replacement rate anyway! With annualised revenues of around £300m, which we suspect is sustainable the potential for operating profit is c £15m pa (EBITDA of c £18m) is feasible. The current EV is around £70m.
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