Market Commentary - Housing, Infrastructure, Construction and Services
CRH and John Laing Group provide Interim Results this morning for the period to end June 2016. The revival of the Merchants continued yesterday with Grafton rising 5.3% and Travis Perkins by 4.0%. Balfour Beatty, Kier and Galliford Try all rose by more than 2% as well.The focus on cyclical caused a lack of interest in Compass, Berendsen, Homeserve and Rentokil which were all down by around 1%. These stocks are drifting only because the attention is elsewhere and have yet to get to prices that rekindle interest. That will happen in time as sentiment swings but we are not at that point, yet.
CRH and John Laing Group provide interim results this morning for the period to end June 2016. CRH is always worth following as its spread of operations allows good read across .The meaningful numbers are on pro forma basis as the purchase of assets from Lafarge/Holcim was very large in relation to the business . The pro forma data show sales up 8% and EBITDA up 20% with substantial revenue growth in the Americas (13%) offsetting slightly slower growth in Europe (3%) and Asia (4%). For reference on the scale of the business the headline revenue was €12.7bn. The EBITDA margin at 8.8% while higher than last year should probably be higher given that the mix of the business is changed to more capital intensive heavyside products. John Laing Group (JLG) tell us that good progress was made in the period. The Infra Cos have seen strong support in the last two months as investors seek yield but JLG remains alone in trading below its NAV at 236p a share versus the reported level of NAV per share at 263. There are some reasons for that (eg, a pension deficit of £36m) but as others trade on premiums to NAV the gap is possibly wider than it might be. More below.
The revival of the Merchants continued yesterday with Grafton rising 5.3% and Travis Perkins by 4.0%. Balfour Beatty, Kier and Galliford Try all rose by more than 2% as well. The Merchants have taken a while longer to respond to the positive news on demand from the new build residential sector than the house builders themselves. YTD Grafton remains down 6%, Travis is still down 9% and SIG is 32% below where they started the year, even after recent positive moves. We suspect that there may be more “gas in the tank” for the Merchants as the valuations are still well below levels reached earlier the year and the news on sales volumes and prices is in line with were they were expected to be. The real puzzle remains SIG where we believe that the latent value is high and the drive for efficiencies and higher margin areas is so far unrecognised by the market. We attended the analysts’ meeting and it is clear that better answers are required to the legitimate questions raised by the performance and explanation of prospects. If that is all that is holding the company back then it can be solved swiftly and 118p is possibly the wrong price.
The focus on cyclical caused a lack of interest in Compass, Berendsen, Homeserve and Rentokil which were all down by around 1%. We feel that these stocks are drifting only because the attention is elsewhere and have yet to get to prices that rekindle interest. We suggest that will happen in time as sentiment swings but we are not at that point, yet.
The Infra Cos are of great interest as it a sub sector that has been largely ignored until recent months. It is poorly covered by brokers from what we can see which is the norm for stocks new to the market and in which there is limited trading and for which the total value of the sector is only around £15bn in terms of market capitalisation. The emergence of PRS and the increase in interest in Infrastructure may change that. JLG is a little more biased towards project origination and greenfield than some rivals though in most cases there has been a shift in that direction, most notably JLIF. JLG manages funds on behalf of JLIF and John Laing Environmental as well as its own funds and some PPP assets in the John Laing Pension Fund. It has £1.3bn of external funds under management and a short £1bn of its own. It is a bit complex, which does not help investors but that does not mean it’s not worth taking time to understand the picture. This short note is not the best place to describe Infra Cos so we shall stick with the main issues. The pipeline of new primary projects at £1.3bn; it is defined as projects that are likely to reach financial close within the next three years and it is higher now than it was in December 2015. The primary portfolio is performing well and while £50m of the £128m rise in NAV can be attributed to FX there are some real improvements to value arising from management action. There is a string demand for Infra investment and the secondary market remains active though pricing is tough, hence the increased emphasis on origination. For today we can do little more than commend investors to look at the sector. The read across to Balfour Beatty and other companies with Infrastructure asset investments (eg Carillion, Interserve) is positive as well as it is for JLIF and others.
The numbers from CRH confirm that construction markets throughout the world are in reasonable health with the US leading the way in terms of growth. CRH repeats the notion that Euroland is in the early stages of recovery but aside from the DACH area it’s hard to see that there should be cyclical growth as populations are aging and in long term decline, but that is another story! The geographic round up of performance can be summarised as being quite mixed conditions in Euroland with signs of growth in some areas (Netherlands, Germany) and subdued activity in other areas (Switzerland, France); the US is performing very well and Asian growth is slow but steady. Net Debt was €7.1bn, up by €5.9bn this time last year and the company has promised it will fall, as at around 2.5x EBITDA, it is a draw back. It did not however prevent the company spending €150m on acquisitions in the period of which €14m was deferred consideration. As outsiders it appears that the read across to construction markets is positive and that CRH needs a little more time to regain stability after the trauma of very major asset purchases from Lafarge/Holcim.
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