Market Commentary - Housing, Infrastructure, Construction and Services
It's getting a bit slippy out there!
The market is likely to be positive regarding the news today from HSS Hire and a little negative on Grafton which is a tad more cautious than it has been previously about the UK market, though not much different than Travis Perkins. Both companies have released in their Interim results this morning. Market conditions are weighing a little on progress in both companies but positive management actions are being taken to mitigate the adverse effects.
In our view, the market is likely to be positive on the news today from HSS Hire and a tad negative on Grafton, which is more cautious than it has been previously about the UK market, though not much different than Travis Perkins. Both companies have released interim results this morning. Market conditions are weighing a little on progress in both companies, but positive management actions are being taken to mitigate the adverse effects.
Grafton’s revenue rose 13% in headline terms (12% at CER) and was split 50/50 between organic and acquisitions. Operating profit rose 12%. The company has announced some £20m of organisational restructuring costs that will be charged this year to improve future earnings. Grafton does not reassure that it is trading in line with current expectations but does promise growth this year. However, with 22p of EPS it looks pretty much on track for consensus of 46-47p for the full year. Our reading is that there is a nudge from the company suggesting there are a few more risks than previously expected but nothing serious and certainly not company specific.
HSS has seen a 14% rise in revenue in the period (13% l-f-l) and underlying EBITDA advanced 11% as the company improved its existing operations rather than follow the previous strategy of dashing for fast growth. The company has gone back to basics, which is exactly what was needed. The positive outlook statement should also be helpful. More below.
The moves yesterday saw Balfour Beatty continue its positive progress, rising 1.2% to 283p. We have discussed the stock at some length. It seems that the trading band has probably shifted upwards and become wider following recent results, to 250-280p. Galliford Try lost a little of its recent sparkle and was the largest faller, down 1.9% as the market took a small reality check on the housebuilders.
Grafton’s numbers for revenue and earnings are as expected. The headline today is that UK trading conditions in July and August (up to 21st) were marginally positive and that, plus the outlook, has prompted the company to take action on its cost base to improve earning. Conditions in Ireland were positive in that same period with 11.2% revenue growth in merchanting and 3.6% growth in Irish retailing. In the UK merchanting revenue in the first half rose 8.2% (3.3% l-f-l) but operating margin from trading fell from 5.8% to 5.3%, which is not quite as expected as market conditions were highly competitive. Price deflation was 1.3%. The roll out of the successful Selco format continues and its profit performance was ahead of last year, we are told. The problems seem to be in Plumbase and it is widely reported that plumbing and heating markets are highly competitive; the actions taken to improve performance are consistent with what rivals are doing as there are few signs that competition in the boiler and copper-based product segments is changing for the better as far as merchants are concerned. We shall attend the Grafton meeting and report back as appropriate. The company has always been candid about its markets and the news today should be no surprise; the actions promised are typical of the company’s pro-active approach and should reassure investors.
Hire companies Speedy and HSS have faced a tough time from investors recently. The news today from HSS we believe to be positive, especially the emphasis on making existing operations better rather than much bigger. The statement today is filled with promises to simplify operations. Focus on capital efficiency and implement programmes to improve customer service. EBITDA at £32m is on track for a full-year out-turn of around £65-70m, which points to the current valuation being on the low side.
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