Market Commentary - Housing, Infrastructure, Construction and Services
Corporates in the HICS sector are light on reported news today, which is no bad thing. Tomorrow Nationwide tells us about August house price shifts in the UK and HSS Hire and Grafton release their half-year results and on Thursday Alumasc releases its interims. Friday last saw SIG gallop ahead rising 6.3% to 126.6p as news came out that Canadian company IKO Enterprises has raised its shareholding to just over 5%. There were few moves downwards on Friday with Carillion the main faller, it dipped 4% to 270p. It has faced substantial selling pressure since last Wednesday afternoon following results released that morning; volumes were much higher than normal.
Corporates in the HICS sector are light on news today, which is no bad thing. Tomorrow Nationwide tells us about August house price shifts in the UK and HSS Hire and Grafton release their half-year results; on Thursday Alumasc releases its interims. There should be few if any surprises and Grafton has already told us its sales progress in the period under review. Attention will therefore be on events since 24 June and we think they will all say it’s too early to tell, which is the only sensible statement anyone can make at this stage. The house price index news might generate surprises as Nationwide is more representative of London and the South East where stamp duty changes and international demand will have had most effect.
This time in the quarter is always good for speculating on FTSE index shifts; the next reshuffle is based on closing prices Tuesday next. The only near certainty in the sector is that Berkeley Group will be relegated from the FTSE100 and on current form Polymetal will take its place. Falls often become self-fulfilling and in the quarter following relegation stocks often bounce back.
Friday last saw SIG gallop ahead rising 6.3% to 126.6p as news came out that Canadian company IKO Enterprises has raised its shareholding to just over 5%.
There were few moves downwards on Friday with Carillion the main faller, it dipped 4% to 270p. It has faced substantial selling pressure since last Wednesday afternoon following results released that morning; volumes were much higher than normal. Whether that pressure is now gone has yet to be seen but we suspect it has and the stock is trading on a prospective P/E and yield of around 7; to be more precise 7.4x 2016 earnings and 7% yield. Clearly the company has an impaired balance sheet with high debt and a high pension deficit and little alternative but to trade through the situation. It has done that successfully for five years and there is no “silver bullet”. But equally, with near 55% of revenue from long-term services contracts and, a highly cautious approach to construction project risks in the rest of the business, is there any reason to suspect it cannot continue to deliver? A commitment from new FD to a more radical approach to reducing debt would aid sentiment considerably and that is likely to mean disposals; the trade-off between reduced earnings from selling something and reduced debt is one shareholders might appreciate.
Last week’s moves
The HICS sector revival continued last week with an overall rise of just over 2% against a fall in the main market indices of 0.2%. The FTSE housebuilders sector was in positive territory last week YTD for the first time in a while, up 2.3% for the year. The main sector move is the rise among the Construction and Materials stocks buoyed by good news from some we look at in detail, such as Balfour Beatty and Costain and some we do not such as CRH. The services stocks are up 6.4% YTD, slightly behind the market’s 9% rise and the contribution of HICS stocks is varied with the UK biased Merchants still well down and the international services stocks (Compass, Rentokil, Serco) advancing strongly.
The main riser last week was Grafton, up 13.4% to 600p as perhaps it is starting to be recognised that the 20% of sales in Ireland could be having a highly geared impact on operating profit and that the pace of progress could rise further. The news last week from Kingspan on progress in Ireland was a bugle call to investors. And those investors who like to play themes, Ireland should be a key beneficiary of Brexit (whatever it means) if the number of colleagues who applied for an Irish passport on 24 June is anything to go by. We shall find out tomorrow of course but with 46-47p of EPS expected this year before currency tailwinds are taken into account many investors may find the valuation attractive.
We should also note the near 10% rise in Interserve and the 8% rise in Balfour Beatty that shows support for these infrastructure “plays” IRVE needs a 20% increase in value to get back into the FTSE250, which is a very big ask ahead of the next reshuffle but is not beyond the bounds of possibilities for the December changes.
The largest loser last week was Carillion, down 4.9% for reasons already covered and which in general terms sit oddly with the rises in the peer group. Arguably there was reasonable support as the selling pressure was such that in the past it might have caused a much sharper decline. But the valuation of Carillion is not far from that of IRV now suggesting that it may be at the bottom of its range.
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