Market Commentary - Housing, Infrastructure, Construction and Services
Marshalls and Lavendon provide us with their half year results this morning and Speedy Hire has announced the sale of its large mechanical fleet to private equity backed rival Ardent.
There was little pattern to the moves yesterday as the market heads into the Bank Holiday and the Fed announcements; few investors are willing to take strong views. Volumes were light and we suspect will remain so until early September.
Marshalls and Lavendon provide us with their half year results this morning and Speedy Hire has announced the sale of its large mechanical fleet to private equity backed rival Ardent. Marshalls increased revenue in the period by 2% to just over £200m and operating profit by 18%; the company has always kept a low profile and the news that it is quietly getting on with delivering what it said it would do will come as no surprise. Lavendon’s 13% rise in revenue in the period, 17% rise in EBITDA and 10% rise in operating profits is also on track with expectations. Both companies have paid attention to shareholders with a dividend increase, 29% at Marshalls and 18% at Lavendon. Speedy’s news is interesting as it is the first major corporate action from relatively new CEO Russell Down and provides evidence of actions to back statements about strategy made at recent results sessions. In normal circumstances it might attract little attention but with the EGM coming up it perhaps has more significance, though for reasons outlined below it is probably unconnected with the pressure on the Chairman. More below
The sector was broadly down yesterday with the largest loser, Carillion, 4.9% lower at 282p and the biggest riser, Berendsen, up just 0.9% at 1221p. The retrace at Carillion was predictable as the news from the company was not such that it would cause a re-think of valuation. It is progressing as per guidance, should hit 36p of EPS this year and has yet to find a solution that will resolve its debt and pension issues, other than on a long term basis. The crucial Openreach contract with BT is due for renegotiation and it may be that Carillion will lose some regions but may sustain revenue and earnings from its work as BT spends more on the local loop, given the pressure it is facing. Carillion remains undervalued and well shorted but there are no signs that it is about to crack in the short or long term and those shorts will need to close at some point as it’s a very expensive bet to carry.
There was little pattern to the moves yesterday as the market heads into the Bank Holiday and the Fed announcements; few investors are willing to take strong views. Volumes were light and we suspect will remain so until early September.
Marshalls is behaving exactly as we might expect a well-run business at this stage in the cycle and after substantial self-help applied in the recession. Interestingly the company states that sales in May and June were ahead of the prior year and since the year end demand appears to be unaffected by the Referendum outcome. Sales into the Public and Commercial segment (c 60% of the total) were flat in the period but in the domestic market sales were up 7% and by 12% in May and June. The company is still struggling a little with its international expansion as sales were down 11% (5% of total sales) in the period though the loss in the area was reduced at the same time. Net debt was £8.8m, down from £33m this time last year and the pension has a surplus of £8m. With EPS of 10.4p at the half way stage the business is well on track for the current consensus full year out-turn of 17.5p and we expect to see forecasts nudge upwards today
Lavendon is another story of self-help in improving markets delivering a very good out-turn. The statement emphasises the momentum established by changes put in place some 18 months ago which are now yielding good results. That programme involved additional capital investment in new kit, which was the main risk but that seems to have benefitted the business, along with the operational improvements put in place. The key has been to strengthen the company’s position in its main markets and provide a differentiated offering in powered access. That investment is reflected in the operating profit rising more slowly than EBITDA as the additional depreciation of the new kit erodes the operating margin a little in the early phase of the programme. Net debt rose to £150m from £120 at end December 2015 indicating the additional investment; net debt/EBITDA is 1.6x so is not onerous. With EPS of 7.4p at the halfway stage the business is on track for 18.5p for the full year and the risks to the forecasts are more to the upside now, boosted not just by good performance but also by FX
The move by Speedy is a surprise in some ways but perhaps not given the focus now being applied to its product and service range. The change in the mix of products Speedy is willing to own and rent has been underway for a while and was shown mainly in a switch to more complex equipment and away from general tool hire. The sale announced today will bring net cash proceeds of £14.4m which can be recycled into new kit or used to reduce debt of c £100m. The operations being sold generated revenue of £3.2m and EBITDA of £1.9m in the 12 months to end July 2016. The statement indicates, somewhat curiously, that Speedy will rehire the kit for five years with a possible two year extension; this is likely to involve the long term partnering approach which the previous CEO at Speedy admired but of which the current team is less enthusiastic. Speedy is no doubt aiming to complete current contracts and has reached a suitable arrangement with the buyer and the current customers.
The buyer of the Speedy fleet is Ardent which has annual hire revenue of around £80m before this deal. The company recently appointed Greg Fitzgerald as Chairman and at the same time and after nine months as CEO and investor former Speedy CEO, Steve Corcoran, left the board of Ardent and is now a Special Adviser. Ardent may by now have appointed a new CEO, headhunters have been prowling but there has been no announcement.
This sale is good news for Speedy as it releases capital that can be applied in the areas of focus or used to lower debt and has a limited impact on the overall level of earnings in the short and mid term. The equipment being sold is relatively specialised but more importantly is not in the area which the new top team believes it can offer something strategically different and make above average earnings. Ardent clearly has a different view which is what makes the world go around.
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