Market Commentary - Housing, Infrastructure, Construction and Services
Interserve and WYG have experienced substantial share price pressure recently and this morning both announce contract wins. Scheduled news this week, according to The Times, is provided by SIG tomorrow with its interims (Amec and Savills also report providing useful read across) and G4S and Interserve report on the first six months of their financial years on Wednesday.
Interserve and WYG share prices have been under substantial pressure recently and this morning both announce contract wins. IRV has its interim results announcement on Wednesday and has made a useful start to the week with the award of a £20m extension for two years of additional work providing security services to the BBC. WYG has been awarded €12.6m of work in Poland (€6.6m) and Turkey (€6.0m) through the EU financial framework. WYG is anxious to maintain its status as a key provider of consultancy to the EU. These awards provide early proof that local operations, within the EU, can win work despite ultimate ownership of the parent company possibly being outside the EU. Of course the UK is still very much a part of the EU now so it is very early days. But there are so many examples of public sector contract awards in the HICS sector made to companies domiciled in other territories that the battering WYG’s price has received since 24 June is not logical. More below.
Scheduled news this week, according to The Times, is provided by SIG tomorrow with its interims (Amec and Savills also report providing useful read across) and both G4S and Interserve will report on the first six months of their financial years on Wednesday.
The 6.1% rise in Polypipe shares to close at 259p was the best performance last Friday (5 August) and the return of support for the stock may be seen as overdue by many commentators. With 23-24p of EPS expected this year, the shares remain undervalued compared with historical levels. The performance this year will not be aided by the boost received in 2015 from lower fuel prices but the boost to earnings from the Nuaire deal and sustained levels of new house construction should support growth. Mears who report interims on 16 August had another positive day and rose 3.3% to 420.6p and are now at the highest level since April. The forthcoming results we suspect will be quite positive as they will include the impact of recent contracts wins, the Morrison acquisition now starting to get “norm” margins and the fruits of the development of a more comprehensive offering to core customers in both Social Housing and Care. Serco fell 2.3% and Rentokil 0.4% in small retrenchments after recent strong support, due to trading flow.
It is a measure of the times that Interserve, with annual revenue of some £3bn+, announced a contract worth just £10m a year for two years. Arguably, with the company valuation so far adrift from its peers such news is price sensitive. The management is fully aware of the rules of engagement in the quoted arena so the absence of news on earnings, which it knows consensus forecasts to be around 65p of EPS (underlying and including equipment hire as continuing) means it is confident that existing guidance is valid. So, a share price of 301p at close on Friday (5 August) remains a low valuation by any standards. There will be plenty to report on Wednesday so we would hold fire until then. The lack of support appears phenomenally high for few good reasons.
WYG must have one of the most frustrated management teams in the sector. The near death experience of around five years ago was followed by years of hard work to pull the company up by its bootstraps (with £ help from investors) and for the share price to reach a five year peak of 142p in early June only to plummet to below 100p following the referendum result on 23 June. The fall in the share price has, for some, created a great buying opportunity. The notion that the EU will stop awarding contracts for social and economic development to WYG, one of the leading companies in that specialist field, is not rational and some might argue that the awards announced today are early proof that the concern is overdone. The top team has done as much as it can to please investors, including the sensible alterations to the share incentive scheme, but could do nothing about the outcome of the referendum. All the company can do is to make its case and keep winning EU work and in the context of WYG’s annual revenue of around £135m, today’s awards are material.
Last week’s moves
The sector rose a little less than the market last week with a 0.3% rise versus the 1.0% increase for the All Share. The housebuilders were the best performing subsector with a 1.1% increase, as might be expected with the interest rate change on Thursday. We suspect the housebuilders will receive further support in the coming months as the new government makes clear its support for the sector and it is realised increasingly that build volumes are unlikely to fall even if price growth fades.
Polypipe was the best riser last week, up 8.8% to 260p although it remains 25% down YTD despite unchanged guidance for the current year. Clearly the market sees its growth prospects being less promising now than at the peak level of 360p at the turn of the year. We have discussed the stock already and at 11x P/E for the current year the valuation is on the low side but previous peaks may have been a big stretch as well.
Atkins is climbing slowly back into favour and rose 5.6% last week to 1481p, now down just 9.1% YTD. The stock has taken a battering for few good reasons that we can see. Continued high levels of demand in the UK and good progress outside the UK, with earnings boosted by sterling’s new level, should help sustain the current price level. EPS of 115-120p are expected by the market for this year, to end March 2017, the range is wider than normal due in part to the impact of sterling.
Grafton was the largest loser last week as it seeks to gain traction. It fell 3.7% to 538p. The arguments for saying the selling is overdone are numerous. Perhaps the market is highly focused on its expansion of the Selco format in London, which might be seen as bearing the brunt of any housing slowdown and on sluggish developments in Belgium and Holland. The company does not report its interims until late August so it will not have the opportunity to have its say for a few weeks. We suspect that Selco will have performed well and that growth in Ireland will have more than offset any difficulties in other Euroland operations. No doubt conversations post Travis Perkins results have touched upon who has lost share if TPK has gained it, as claimed. If Grafton has seen an impact from TPK’s marketing and is suffering from continued weakness in Heating and Plumbing, it is not hard to argue it is already well discounted in the share price at close on Friday (5 August).
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