Market Commentary - Housing, Infrastructure, Construction and Services
There is little new news today. The Toscafund letter to the Speedy chairman and the responses, plus an update from Grainger, are the only pieces to guide us today. Yesterday two stocks rose by 16% or more: G4S was up 16.0% and Interserve 16.5%. Speedy was the dominant player in UK Hire, but six years ago lost its way as its markets declined in the recession and never really got back on to its game, especially as the hire sector changed as well. Investors have plenty of reasons to be dissatisfied over a long period so the reaction of Toscafund should be no surprise, in our view.
There is little new news today. The Toscafund letter to the Speedy Chairman and the responses, plus an update from Grainger, are the only pieces to guide us today. On the first issue the puzzles are first, how Speedy got itself back down into difficulties post the departure of Steve Corcoran and second, why the share price barely flickered yesterday at the prospect of a more vigorous approach being applied to extract value soon. Briefly on Grainger, the PRS specialist, which in its update this morning tells us that trading is in line with expectations for the ten months to end July and that Brexit, so far appears to be having no impact. The rise and rise of PRS is significant for housing provision in the UK and as Grainger points out its work, and in particular, establishing a residential REIT is not only good for its shareholders but is proof of the concept and its validity. More Below
Yesterday two stocks rose by 16% or more, G4S was up 16.0% and Interserve 16.5%. We attended the G4S results meeting and the mood was the most upbeat in the three years since the new top team took up their posts. And yet it was also cautious in tone as there is much yet to do and those opportunities are in the minds of the board. The big change is probably that there is now a clear determination to reduce net debt and a credible path to get there and evidence of progress. The key issues are first, that organisations want the security and cash handling services that G4S provides and the level of demand is rising and second, G4S has done a great deal of work in the last three years to provide services in a better way than its rivals by investing in processes, training, sales and marketing and technology. The price closed at 227p last night but with 15-16p of EPS expected this year and much growth beyond the rise yesterday may be that start of a journey back to 300p by Christmas.
The clash of timings with G4S meant we could not attend the Interserve meeting, which was by all accounts highly reassuring on several counts, hence the share price rise. IRV’s top team know the rules of engagement as a quoted company and have been solid in maintaining guidance for underlying earnings this year at around 65p. It seems that the market is now starting to believe them and along with the better than expected position on debt, support was strong.
The move by IRV begs a question around other similarly placed stocks and the obvious one is Carillion. While the extent of the share price decline at CLLN is nowhere near as steep as it was at IRV in the last few months, its valuation at 7.6x prospective P/E is at an historically low level and, we believe, fails to reflect the long-term nature of much of its work and an order book near 4x annual revenue. It reports on 24 August.
Speedy was the dominant player in UK Hire but six years ago lost its way as its markets declined in the recession and it never really got back on to its game, especially as the hire sector changed as well. Investors have plenty of reasons to be dissatisfied over a long period so the reaction of Toscafund should be no surprise. As outsiders the business appears to be moving very much in the right direction under the leadership of Russell Down, CEO for just over a year, but the pace may be slower than some would like and clearly moves to consolidate the sector have been blocked by the Speedy Chair. Our sense is that there is an excellent business within Speedy and that the pace of recent change might be what the company can cope with financially and in terms of organisational change. But we could be wrong as it might be possible to go a tad faster and having appointed a new FD recently, we believe the need for an Executive Chairman (a post intended to be temporary but extended) is questionable.
The Speedy price hardly moved yesterday and yet if some of the ideas in the Toscafund letter are put in place, the valuation could be higher. We do not read too much into the market reaction but comment on the lack of it yesterday. Speedy in its current form should be capable of c £75m EBITDA and growing from here. Normally hire companies are valued at 5-6x EV/EBITDA and Speedy now trades on an EV of £290m. To get to £75m of EBITDA little new debt is needed so the upside is all for the shareholders. The letter is likely to get a reaction but if all it does is emphasise the possible undervaluation today of Speedy it will have done a job.
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