Market Commentary - Housing, Infrastructure, Construction and Services
News from Interserve and G4S this morning. Both stocks performed well yesterday rising 2% and 3% to 320p and 196p respectively and the information released today may help sustain the position and perhaps trigger further progress.
The market was not as enthusiastic about SIG’s numbers as we expected. The stock fell 6.2% yesterday at COP to 100.5p having risen 5% at the open. The reduction in GM over the last few years from around 29% to the current near 27% is, we expect, at the heart of the issue.
News from Interserve and G4S this morning. Both stocks performed well yesterday rising 2% and 3% to 320p and 196p, respectively and the information released today may help sustain the position and perhaps trigger further progress. Interserve’s numbers are in line with expectations and with 31.3p of EPS underlying, at the halfway point the business is well on its way to the 65p for the full year. Revenue and earnings were up around 2% and for choice we should say they were stable. Net debt fell to £276m from £309m and the year end position guidance is improved. The £70m exceptional charge for the withdrawal from the waste to energy business is a blow but, we believe, the share price is reflecting more than that at present. G4S hit the key issues early in the statement and the 5% rise in revenue at CER (£3.0bn at CER and L4L, £3.5bn statutory) combined with an 8% rise in PBITA plus operating cash flow at near 1.5x PBITA should aid sentiment. Net debt/EBITDA remains stubbornly high at 3.2x not aided by sterling weakness which hit the debt number at the period end. The dividend was maintained at 3.6p a share even though EPS rose 14% to 6.6p; that is probably right for this stage of the game.
The market was not as enthusiastic about SIG’s numbers as we expected. The stock fell 6.2% yesterday at COP to 100.5p having risen 5% at the open. The reduction in GM over the last few years from around 29% to the current near 27% is, we expect, at the heart of the issue. The company might have been more prepared for the question but that is part of the issue for SIG investors. The answer given was that it was about volumes, but we suspect it is more nuanced than that and involves issues of geography and mix as well. The share price move is quite harsh given that the company has delivered as expected and has several areas in which there is substantial earnings potential, off-site construction and air handling being the two main prospects. We suspect the sell-off yesterday will be seen as an overreaction though management can help a little more in explaining the case; perhaps that will happen over the coming days but there is certainly substantial recovery potential that many will say is not in the price at 100p. With 11-12p of EPS expected this year the rating is lower than the peer group’s average of 12x.
The numbers and statement from G4S indicate a significant increase in the rate of transformation which, to date, has arguably been too slow for investors. The new top team has been in place for over three years. The size of the business, its widespread nature and the depth of the issues it faced three years ago were probably a surprise to many. Getting over 620,000 employees aligned in sometimes difficult situations is no simple task, especially also when technology developments and customer requirements are altering. New contracts with a value of £1.4bn were won in the period and the pipeline was maintained at £6.3bn. The company placed heavy emphasis this morning on its investment in IT, product and service development, innovation and productivity; the latter is a good contributor to the operating margin rising from 5.1% in 2013 to 6.4% now and providing potential for further growth.
Looking across the G4S geographies, revenue and PBITA grew in nearly all areas with just UK and Ireland showing a small, 2% fall in revenue although PBITA grew even in that region. The 16.4% rise in the Middle East and India revenue was the stand out performance. The UK revenue dip was due to lower levels of activity in employment services and for the full year the company indicates that the living wage will probably have a stronger adverse effect than in the first half, offsetting the benefits of better productivity. A deeper analysis of the geographic performances can wait until after the meeting.
The important issue for investors this morning is that G4S is on the front foot with regard to improving its operations, finally disposing of underperforming and non-core operations and indicates that its markets are showing high levels of demand. The consensus EPS is at around 15p and FX for the rest of the year will have an impact as 80% of activity is outside the UK so it is subject to greater uncertainty than usual. At around 200p the shares are rated below the peer group which are on 22x prospective P/E.
Interserve’s stable performance is echoed in the statement with much of the text saying that little has altered. The Waste to Energy problems came as a shock, as did the announcement with the 2015 Finals that the Equipment Services operations were subject to a strategic review. Two shocks in a short space of time unsettled investors and triggered the nosedive in the share price. The order book remains stable at £7.6bn and there is little to pick out from divisional performances of note. The Equipment Services operation strategic review is expected to conclude by the year end which suggests that if it is for sale few buyers are forthcoming at an acceptable level. We suspect the operations will be retained. At 320p and with the EPS at 65p this year and the dividend increased slightly, IRV might just get some support today.
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