Edison Investment Research

Market Commentary - Housing, Infrastructure, Construction and Services

Speedy Hire and Barratt Developments provide trading statements this morning, the former quite concise and the latter almost eliminating the need to have a results announcement. Several strong rebounds yesterday saw Interserve rise 8.8% to 281.5p and Galliford Try by 8.4% to 956p. Carillion, Kier and Morgan Sindall all rose by 5%. The May Day bounce still leaves the stocks well short of pre Referendum levels but the short term risks clearly still justify caution at this stage. The issue for investors is whether the long term value of these stocks is altered by recent events and the likely course of progress in the sector.

Speedy Hire and Barratt Developments provide trading statements this morning, the former quite concise and the latter almost eliminating the need to have a results announcement. On the main issue of the day Speedy say that it has seen no impact from the Referendum uncertainty (for reasons we mention below) in the first quarter of its financial year and Barratt say it’s too early to tell and point to the longer term issues that are positive for the sector. Let’s hope Barratt reveal something of its experience over the last two weeks in the 8.30 conference call. Both companies point to good trading experience in the periods covered with Speedy pointing to revenue slightly ahead of last year which, given its focus on revenue quality, is a very positive out-turn and utilisation was 50% at the end of the period which is a substantial improvement. Speedy has nudged the guidance a little higher for the current year. More Below.

Several strong rebounds yesterday saw Interserve rise 8.8% to 281.5p and Galliford Try by 8.4% to 956p. Carillion, Kier and Morgan Sindall all rose by 5%. The May Day bounce still leaves the stocks well short of pre Referendum levels but the short term risks clearly still justify caution at this stage. The issue for investors is whether the long term value of these stocks is altered by recent events and the likely course of progress in the sector.

The noises to date from likely principle actors in the new government suggest that spend on Infrastructure and Construction are likely to be promoted in a very positive manner. The new PM has been a strong advocate of HS2 and is likely to take into account broader interests when considering Heathrow expansion than she was able to when she was just MP for Maidenhead. Substantial investment in housing and energy generation can be expected. Clearly there is also much private sector investment that drives demand in the sector and business s confidence is much lower than it was and that needs to be taken into account. Our sense therefore, ahead of reviewing our numbers, is that the NPV of the Contractors may be a tad lower as near term earnings could be affected by the hiatus and project delays but the longer term value is broadly unaffected. Costain, Kier and Galliford Try stand out at current levels and if Fit-Out spend is maintained at current levels MGNS is also cheap. Carillion is broadly unaffected by Brexit and always was but got caught in the “Great British Sell Off” in recent weeks.

The losers yesterday were the steady performers much in vogue since 23rd June such as Rentokil, down 2.5% to 205p and Mears down 2.0% to 385p. Our sense is that this is no more than the ebb and flow of trade and the moves are small and the volumes are only slightly above the average levels. The next stage for RTO is potentially FTSE 100 entry, in due course as its market cap is now £3.8bn and the share price trajectory is very positive.

On the theme of FTSE 100 status Berkeley with a market cap of £3.5bn and Travis Perkins with £3.7bn look vulnerable as the trajectory is not good. Sector sentiment is quite volatile at present of course and much can happen between now and the next reshuffle in early September. It’s one to watch rather an issue that should cause concern and certainly not any action at this stage.

Speedy’s statement that results are likely to be slightly ahead of previous expectations is probably not as bold as it may appear, given the uncertainties all other companies are talking about. The reason behind our view is that it in the downturn it established many supply agreements with Infrastructure providers and spend in those areas is broadly immune to the current issues, indeed it may be a long term beneficiary of government spend. Also the new top team at Speedy has smartened up the whole IT and sales and marketing profile from what we hear, cutting costs along the way. Combine that with a switch in products away from commodity tool hire and more towards specialist products that carry higher margins and you can begin to see that things have altered for the better at Speedy. Let’s not get carried away of course but potentially we could see the stock get back comfortably to EBITA of £65m this year with potential beyond that. We are told today, in a numberless update that net debt is below last year’s level which was just over £100m so EV at close last night was £260m, 4x EV/EBITDA. That is too cheap.

Barratt’s update tells us that it performed strongly in the year to end June. Total completions rose by 5.3% to 17,319 and the ASP rose 10.6% on all sales to £260,000. And as a measure of confidence in the short term performance forward sales rose by 19% in the wholly owned part of the business. The company went so far as to say the land market was attractive and it bought 24,387 plots last year and yet still ended the year with £590m of net cash, up from £187m last year. The trend for buying land on deferred and often conditional terms continues and 38% of the land bank is now on deferred terms. The financial burden of carrying the asset and large elements of risk are now transferred to the land vendor and Barratt is not alone in that regard. The statement focusses on the company’s drive for higher ROCE which is achieved through the land strategy, lower build costs/standardised product and a relatively short land bank. We suspect that the hosuebuilders’ “crash” of recent weeks was overdone and while it may take time to get back to the peaks seen earlier this year there is much room for recovery at current levels. And the new government is highly unlikely to withdraw the current boosters for the sector.

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.