Market Commentary - Housing, Infrastructure, Construction and Services
The only item of relevant formal news this morning is the Speedy Hire board’s response to Tosca and calling notice for the EGM to be held on 9th September. Morgan Sindall was the best riser yesterday, up 3.6% to 701p as John Morgan proved his confidence in the business by buying 500,000 shares at 640p; £3.2m is a big chunk of change so naturally the market listened. The Builders merchants are still suffering a lack of support with Travis Perkins falling 2.2% yesterday and Grafton by 1.7%. Negative broker comments were unhelpful to the companies’ causes yesterday.
The only item of relevant formal news this morning is the Speedy Hire board’s response to Tosca and calling notice for the EGM to be held on 9th September. The trenches have been dug by both sides and the grenades are being lobbed each way. The key observations at this stage for us are;
• Trading is improving at Speedy and whatever the outcome of the board battle management is likely, in our view, to accelerate the pace of improvement if it can. That would be a quite normal outcome.
• There seems to be agreement that some consolidation is needed in the UK hire market. Toscafund is advocating it soon in the form of Speedy combining with HSS; Speedy adds “...at this time…” to its rejection of an early combination with HSS now. Speedy’s board may be opposed to the combination but the addition of words on timing to the text creates some wriggle room.
The considerable number of meetings that have taken place between the parties since May last year (25 if those with Schroders are included) suggest that there has been attempt at dialogue. It has now broken down but aside from the issue of the Chairman role and related to that the consolidation discussions there seems to be much common ground. And for investors that should be good news as there is a good business with Speedy that needs time to respond to recent improvement actions.
Speedy’s price rose 9% yesterday which is consistent with a view that there is intrinsic value in the company that was and probably is still not represented in the current valuation at 38p a share, if our calculation of £75m pa of EBITDA being realistic is accepted. It is also the case that Speedy + HSS is not the only potential tie up between the four companies that have around 30% share of the UK hire market and which observers agree is ripe for faster consolidation than the piecemeal buy and build we have seen to date.
Morgan Sindall was the biggest riser yesterday, up 3.6% to 701p as John Morgan proved his confidence in the business by buying 500,000 shares at 640p; £3.2m is a big chunk of change so naturally the market listened. John has rarely sold MGNS shares in the past and this is the first substantial purchase for some time. This trade takes his and family holdings back to over 10%, which we guess was part of the aim. Our conversations with the company provided the sense that management believes it is trading far more securely than in the past and but for the outcome of the Referendum might have been even more positive at the recent results than it was. As it turns out of the two areas at MGNS likely to be affected by Brexit, should it ever happen, house sales and fit out, the impact to date has been negligible. At 701p and with 75p of EPS this year the entry point is less attractive than than 640p at which the CEO bought but on a 2/3 year view could be cheap.
The largest loser yesterday was Mears but its 2.6% drop can be ascribed purely to the ebb and flow of trading in our view. The Builders merchants are still suffering a lack of support with Travis Perkins falling 2.2% yesterday and Grafton by 1.7%. Negative broker comments were unhelpful to the companies’ causes yesterday. Our sense is that the valuation hits taken so far in this sector might be anticipating a worse outcome than is likely. Clearly operational gearing with Merchant is high but most have taken some precautions and the suggestion that new residential build volumes will dip is rejected by most observers though commercial and RMI are not at their healthiest. The next sector news is at the end of the month from Grafton with its interims.
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