Market Commentary - Housing, Infrastructure, Construction and Services
The market should like SIG’s numbers today with an 11% rise in revenue at the half year and a 20% rise in underlying operating profit; L4L sales at CER were up 0.7%, 2.3% UK and Ireland and down 1.2% in Euroland. Brexit watch: SIG said sales were flat in June and July although there was an improvement towards the end of July. Savills indicates that the timing of the Referendum along with the traditionally quieter summer months means it cannot easily determine the impact, if any, as yet. So, still too early and/or there are other distorting factors, to which we can add the BoE action on interest rates last week.
The market should like SIG’s numbers today with an 11% rise in revenue at the half year and a 20% rise in underlying operating profit; L4L sales at CER were up 0.7%, 2.3% UK and Ireland and down 1.2% in Euroland. The revenue numbers are better than might have been expected without self help and the operating profit was boosted by £6m from the strategic initiatives in the period to £54m. The company believes that its markets fell by 0.7% in the period so it outperformed. That might be what is expected from one of the market leaders, but it could easily have not been the case without managing the situation. Savills has also reported its half year this morning and the data show revenue up 14% to £623m and PBT up 12%; but it confirms that in the UK commercial transactions reduced prior to the 23 June and have not really picked up since. For Savills though there is other ‘noise’ in the data (US election, legislation changes, interest rate moves) that distort a clear reading of the picture. More below.
Brexit watch. SIG said sales were flat in June and July although there was an improvement towards the end of July. Savills indicates that the timing of the Referendum, along with the traditionally quieter summer months, means it cannot easily determine the impact, if any, as yet. So, still too early and/or there are other distorting factors, to which we can add the BoE action on interest rates last week.
The moves yesterday were interesting. Interserve was the leader, up 4.3% to 316p but with the results on Wednesday, if they are anywhere near up to snuff, might be very positive for the stock. Serco got a back handed compliment from a broker and still rose 3.4% to 132.5p. The journey around the institutions, post results is clearly going to plan in terms of confidence in management’s capacity to deliver the turnaround. The notion that the pipeline needs to be £10-12bn is easy to fulfil by stacking it with uncommercial projects. A fuller pipeline is dependent on available projects, selectivity (risk/reward) and a fully secure existing baseload. Two years ago the mantra was risk adjusted returns not just operating margin; that is no longer to the forefront of presentations but is still present, based on the evidence of actions so far.
One of the more interesting aspects of Serco’s approach, in response to the questions at the analysts’ meeting, is that it can use the best available technology in bids. The acquisition of Telenet was a ‘failed’ attempt by previous management to move up the value chain and get Capita levels of margin. ‘Failed’ because most of the acquired business has been sold and it did not hit the expected levels of performance under Serco’s ownership. The concept may have been right but the execution did not work, neither for the Telenet operations nor for the core services. So much is history but it has left Serco with the benefit of now being able to choose technology partners that are right for the relevant opportunity. ‘You pays your money and makes your choice’ in this regard when choosing investments.
Homeserve slipped downwards 2.6% yesterday to 566p as the prices adjusted a little to recent strength and the move was no more than ebb and flow of trading. The shares trade at a substantial valuation premium to the sector that some find hard to understand. We view the dip yesterday as just trading activity rather than fundamentals.
SIG is the cheapest of all of the Merchants in terms of EV/sales but the news this morning, that it has shown a highly resilient performance in the first half and will show progress for the year as a whole, may help it to close some of the gap. Full year progress will be aided in headline terms by FX of course so the underlying situation needs to be assessed. The company ‘banked’ £6m of net benefits from strategic initiatives in the first half and therefore believes it is well on its way to the target of £10m for the full year. The company also promised at the last results to slow the rate of capex and acquisitions a little to get net debt down; it succeeded in doing so at the halfway stage with a £3.1m reduction to £232m but importantly net debt/EBITDA was 0.6x rather than 1.8x and the target of 1.5x is in sight.
The headline revenue numbers at SIG mask the improvements created by changes in the product lines. Air handling revenue rose by 10% L4L to €128m. Offsite construction product sales rose by 42% to £14.3m. In the context of a business with sales of c £3bn a year, these numbers are not big yet but they are evidence that the company is not standing still in terms of waiting for the market to return or legislation on insulation to ratchet up further. The more substantial short/mid-term gains will come from supply chain improvements and procurement savings. The former delivered £1m of improvements in the first half, we are told and procurement most of the remainder of the £6m with a substantial part of that in Euroland.
SIG still has many challenges ahead as we know but the news this morning suggests that real progress is being made on the route outlined over two years ago despite the slow recovery in Euroland and the Referendum shock that is still reverberating. At 107.4p at close last night the stock might see a positive reaction as the expected 11p of EPS for the full year looks less uncertain now.
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.