Market Commentary - Housing, Infrastructure, Construction and Services
The news today from Persimmon on its first six months is positive and Kier has announced some handy wins of places on framework contracts worth in total some £5.3bn. So the conundrum remains about the housebuilders. In cyclical terms now is probably not the right time to buy but the numbers keep looking good and there is no sense in which the volume of demand seems likely to drop.
The news today from Persimmon on its first six months is positive and Kier has announced some handy wins of places on framework contracts worth in total some £5.3bn the largest of which is the Health service Procure 22 worth £4bn in total to the six delivery partners over the next four years. Persimmon’s 12% rise in revenue in the period and 29% rise in PBT are easily in line with expectations but what may surprise is that visitor numbers are up 20% since 23 July and reservations since 1st July are up 17% compared with the same period last year. The current order book is 2% higher than at this time last year which is a tad lower than we might have been expected but remain positive. The summer months are slower than average so the real test will be over the next six weeks in the autumn selling season. We also need to be wary as new build is increasingly important as a source of supply to the market as second hand sales have dried up. But on the evidence so far from the housing market the outcome of the Referendum is having little impact. More below.
The moves yesterday saw Interserve rise by 3.8% to get back to over 400p for the first time since early May when it revealed a £70m loss on waste to energy in Glasgow. Management has not blinked on guidance that 65p of adjusted EPS is likely this year and on that basis, and peer group valuations, the stock looks cheap. Galliford Try was the second biggest riser, up 3.3% as the housebuilders saw a return of positive sentiment, something likely to carry through to today, given Persimmon’s news. The stocks with relatively stable earnings that have been in vogue since 23rd June fell a little yesterday, but no more than the ebb and flow of trading; Rentokil slipped down 0.7%, Compass by 0.5% and Berendsen by 0.4%. The valuations on all three stocks are not overly stretching so we expect limited change due to fundamentals. Sterling improved a little yesterday which probably also affected the thinking on the headline results for these three companies.
Persimmon’s good results in the period to end June 2016 were based on a 6% rise in volumes and a 5% rise in ASP. In any normal market the company’s ROCE of 36% and operating margins of 23.8% (up 3.3%) would revert to the mean due to competition. That does not happen in housing because the vital resource, land, is owned or controlled by the top 10 housebuilders, as most of us are aware. There are over 700,000 plots owned or controlled by the 10 majors the overwhelming majority of viable plots at present in the UK. So on the theme of what can possibly go wrong the answers include a cyclical dip (likely in price terms but not volume), a change in cost structure in the short/mid term (unlikely in our view) and/or a sudden release of land and building capabilities (highly unlikely) the conclusion has to be that house builders are likely to continue to thrive in a climate of cheap money and low unemployment, along with all Party agreement that more dwellings are needed soon.
During the first six months the company completed on 7,268 new homes and secured 7,108 new plots to take the total plots to 93,519 at the end of the period. Sales rate per site is at 0.75 which is high by industry standards and has risen in the last two reporting periods by 4% and 11%. On all of the other metrics we can see today the company is in good shape to deliver on its longer term 10-year plans, put in place in 2012. At end June net cash was £462m, which may trigger hopes that the company may be able to improve on the 110p a share capital repayment plan which is currently due on 7 July 2017; the company paid out 110p a share at a cost of £338m on 1 April this year and revised the plan.
So the conundrum remains about the housebuilders. In cyclical terms now is probably not the right time to buy but the numbers keep looking good and there is no sense in which the volume of demand seems likely to drop. Government support for the sector has not wavered and indeed may be reinforced should Hammond decide a strong fiscal boost is needed in the Autumn statement. Our sense is that at the current low valuations housebuilders could be very good value for some investors and repeat on 2007-2009 is highly unlikely given the economic backdrop and the changes in financial structure of the companies.
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