Edison Investment Research

Market Commentary - Housing, Infrastructure, Construction and Services

Bovis Homes reported its half year numbers this morning which show an 18% rise in revenue and operating profit. It refers to demand since the Referendum as being resilient and states that sales rates and prices since 23 June have been similar to the first six months of the year. The words robust and resilient feature prominently in the statement and the company indicates the actions it may take to cope with a downturn in the market, which it has yet to see. In common with many other housebuilders the company is scaling back land buying and in its case raising hurdle rates given greater uncertainty. The spotlight was on housebuilders and YTD the sector is unchanged, against the market up 10%.
The latest data from Rightmove on house prices, show asking prices down 1.2% in August, and suggests the caution from Bovis and investors is valid though seasonality factors are also influencing the data. Our sense is that the impact of the Referendum on jobs and wages is not yet being felt and views on the sector will be driven by those macro issues. While the actions of the housebuilders individually make economic sense in the short term it raises a number of issues around the actions of landowners and their need to sell and whether the caution shown will turn into a self-fulfilling dip in the sector. 
Other news of relevance today comes from G4S with the unexpected departure of CFO Himanshu Raja and from Toscafund’s response to Speedy’s RNS of Friday last. The change at G4S is sudden and unexpected and its response was swift as experienced NED at G4S, Tim Weller, takes over the role on 1 October. There is no information in the circular about the reason for the switch. In its latest letter, Toscafund primarily focuses on the lack of response from Speedy on several key issues it outlined in its first letter and the alleged poor performance and governance of the Speedy Chairman Jan Astrand. Whether Speedy will re-enter the public war of words remains to be seen but this one does look as though positions are entrenched and it will take until the EGM on 9 September to resolve the Chairman issue. There is no reason for this boardroom battle to affect current trading at the company and the focus is on the Chairman not on the executive management.
Scheduled news this week in the HICS sector comes from Mears and Polypipe tomorrow, both with half year results and Balfour Beatty follows on Wednesday with data on its progress in the first six months.
On Friday last we saw Polypipe regain some if its support with a 7.6% rise to 287p, the biggest riser in our closely watched 22 stocks. We are expecting the company to do no more that re-iterate guidance in its results later tomorrow, which will be for around 23-24p of EPS. The cautions will be due to the nature of the top team, the lack of evidence that it is facing different trading circumstances than expected and it is the maiden outing at Polypipe for the new FD Martyn Payne. G4S was the biggest loser falling 2.4% to 226.8p as it retrenched slightly following the excellent post results performance. Whether the news on the CFO role will have an impact on the price we do not know, we suggest it is unlikely as Tim Weller is well respected and the circumstances of the departure, as stated, do not suggest there is anything untoward to be revealed at some future date.
Looking at Bovis in more detail the company enjoyed a 14% rise in ASP in the period and a 5% rise in volumes; its ascribes 4-5% of the rise in its prices to general house price inflation and the rest to location and mix. It choked back a little on land buying in the first half adding just 1,267 plots versus completions of 1,601 and the consented landbank dipped by 337 units to 19,477 units from the end December position. The decline in the size of the landbank is not material as such as it remains at over six years current output but it is indicative of the caution we are seeing in the sector. Partly as a result of slower land buying the company ended the period with £8m of net debt versus £59m at the end of June last year. Bovis makes stronger statements about the negative aspects of build cost and skills shortage pressures than several rivals have in recent months. That may be quite specific to Bovis given its recent geographic expansion into new areas in which it has no established supply chain. But in general it is an issue and will become a bigger one in the short term if Brexit means limited immigration though in the longer term, housing demand may decline.
Our sense is that the housebuilders were due a small correction in any event as London had peaked and despite the rise in the Living Wage market conditions for the 80% of the population outside the South East were not that buoyant. There are many reasons to believe that the housebuilders have found a good level for the time being. The key will be for them to maintain build volumes in the next 12-18 months as the suggestion is that pricing will be a tough environment. Demand data indicates that volumes can be maintained if planning is allowed. Much depends on sustained government support and that will not be known for several weeks at a minimum. We suspect therefore that investors, as with the companies themselves, will remain cautious.
The move at G4S is difficult to interpret on the data provided. But there appears from the numbers released last week to be no concern for investors but equally the release does not explicitly sate that the departure is for personal reasons. The existence of a ready-made successor is good news for G4S holders but the sudden change is unusual and will trigger more than a few enquiries.
Regarding Speedy the differences appear to be in the open and while there may be more grenades to be thrown it hard to see as outsiders what further words in public might add. As stated earlier, the important issue is that there is no reason for the boardroom spat to affect current trading and the strategic developments within Speedy that are taking place to improve performance.
Last week’s moves

The main talking points are the 20%+ rises in Interserve and G4S last week and the strength of the Construction and materials stocks which are now up near 14% for the year, ahead of the 11% rise in the FTSE100 and the 9% rise in the All Share.
In the cases of both Interserve and G4S it is remarkable, in our opinion, how the market has substantially misread both stocks. Guidance on earnings and long-term prospects was not altered in the results last week. The lack of support prior to the recent updates seems in both cases to have arisen from a lack of confidence that management will deliver, concerns over historical issues and high debt levels. The news from management was reassuring and positive enough for investors to gain confidence. And both companies were able to draw a line under legacy issues as well as show a path towards lowering debt levels in absolute terms and in relation to earnings. The valuations on both stocks indicate further increases in share price may be likely.
The change in share price fortunes at IRV and GFS begs the question of where next. We suggest that the Merchants might be an area for investors to examine closely. The 20%+ decline YTD in Grafton, SIG and Travis Perkins are discounting the worst case in the eyes of many investors, in our view, and if they continue to take share and as we believe housebuilding volumes are maintained then their volume of sales may be maintained at a higher level than many expect.

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