Market Commentary - Housing, Infrastructure, Construction and Services
Kingspan has delivered strong set of numbers with revenue up 19% to €1.5bn and trading profit up by 50% to €167m. Moves on Friday last week were mixed with Balfour Beatty leading the pack, consolidating the prior day move with a 2.5% increase to close at 260p. There were a few losers on Friday last, the largest being Grafton, down 1.2% to 529p. The weak performance of the stock is potentially unwarranted. Investors might wish to take heed of Kingspan’s statement today regarding sales of insulation panels in Ireland
Kingspan provides news this morning in the form of its half year results. Tomorrow Persimmon report on the first six months of the year and on Wednesday Carillion and Costain do the same. CRH reports its Interims on Thursday to finish the planned formal reporting for the week.
Kingspan has delivered strong set of numbers with revenue up 19% to €1.5bn and trading profit up by 50% to €167m. The performance was boosted by acquisitions, of course, but the company indicate that the acquisitions boosted revenue by 15% and trading profit by 7% so the operating margin growth to 11.4% was really due to organic improvements. The core insulated panel operation, which accounts for 65% of revenue, saw a 26% rise in revenue and a 59% rise in trading profit that took operating margin to 11.8% from 9.3% last year. Currency had a small negative impact on performance, reducing reported revenue by 3% at CER. More below.
Moves on Friday last week were mixed with Balfour Beatty leading the pack, consolidating the prior day move with a 2.5% increase to close at 260p. Prior to 23 June the company traded in a 240-260p range. The recent update has caused it to return to that range and perhaps it is now trading in a slightly higher one. But conversations with the company tell us that management remains cautious and so it should as construction margins will always be a small difference between two very large numbers. Having said that we are hearing that the pipeline is strong and of course in the UK infrastructure spend seems likely to be boosted despite the lack of oven ready projects; there is no doubt that many commercial projects have been put on hold but that will affect BBY less than many rivals in contracting. At 260p it is probably thought that BBY is up with events for now but we suspect that with a tailwind from higher infrastructure spend in the UK and swift resolution of legacy projects a much higher level is likely in the mid term. Mears rose 1.8% to close at 438p, its highest level since January this year.
There were a few losers on Friday last, the largest being Grafton, down 1.2% to 529p. The weak performance of the stock is potentially unwarranted. Investors might wish to take heed of Kingspan’s statement today regarding sales of insulation panels in Ireland “This market has continued its compelling recovery with volume significantly ahead of the same period last year. We anticipate that pattern will continue in the second half”. Some 20% of Grafton’s sales are in Ireland and while insulation panels are not the whole story for either company the read across is positive. With 46-48p of EPS expected this year at Grafton and growth thereafter the share price at 529p is near to its lowest for some time whereas the trading outlook is reasonably positive.
Kingspan is a company that has risen without trace. It is the market leader in Europe (including the UK) in Insulation panels used to build most of the factories and distribution depots on the Continent and is expanding in North America. The position has been achieved via a mixture of investment in capacity and R&D and acquisitions. Its other products include rigid insulation board, raised access flooring and it has a niche operation in making large plastic tanks used for storage of rainwater, waste water and fuel oil which it calls it Environmental division. Its main thrust of expansion has been in the core insulation areas (88% of sales) but it has not neglected its minor products and has used its presence in Australia in insulation board to grow its Environmental products business by acquisition. A morning note is not the place to dwell too long on Kingspan. The read across is strong however and while the company mentions highly competitive activity in some markets and the challenge of recovering raw material cost increases the volume of demand remains high. The 2016 results so far will have been helped by favourable comparisons with 2015 as fuel and raw material costs will have benefited from price changes but overall take nothing away from Kingspan’s performance and the robust demand picture it is painting.
Last week’s moves
The sector drifted last week along with the market as investors marked time without any new data. The market fell by just under 1% and the sector was similar bar a strong performance in Construction and Materials, up 2%. The sub sector was boosted by a good performance from Balfour Beatty after its results and from Ibstock which was treated favourably after resolving some of its pension issues. The C&M sector is now up 16% YTD and the housebuilders are down 1%. The sector overall is now roughly level with the market. We expected the sector to underperform for the year and that remains the main case but with exchange rates boosting the Construction stocks and in many cases their earnings being underpinned by services revenues it may be that the chance of level performance has increased.
The housebuilders are down 10% relative so far as investors look out 18 months as see a few issues emerging; we expect that the volume of build will be sustained, perhaps increased but the pricing environment will be very difficult and build costs might rise as there are fewer new entrants to the labour market in Construction. It is not difficult to construct an argument for a real dearth of skills in the industry starting to emerge.
Balfour was the second best performer last week, rising 8.1% and we have discussed the stock already today. Mears, up 4.2% last week also put in a good shift with results that were in line and promised well for future growth.
The fallers were led by Berendsen which fell 3.5% largely, we expect due to a bit of retrenchment after recent strong performance. The price may have got a little ahead of its self. The consensus may be a little low at 65p for this year, given FX in its favour but a p/e of 18.9x based on a closing price of 1227p on Friday will be regarded as up with events by many investors, we believe. Atkins also suffered a little from re-tracement with a 2.7% fall to 1501p. Trading on p/e of 13x for the year to end March 2017, based on consensus forecasts, does not look stretching.
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