Market Commentary - Housing, Infrastructure, Construction and Services
The full year results from Alumasc, the building products company and a letter from Speedy Hire to its shareholders, ahead of the EGM on 9th September are released today. Carillion (5.8p), G4S (3.6p) and WYG (1.0p) all go XD today
The full year results from Alumasc, the building products company and a letter from Speedy Hire to its shareholders, ahead of the EGM on 9 September were released today. Carillion (5.8p), G4S (3.6p) and WYG (1.0p) all go XD today
Alumasc has reported a 2% rise in revenue to £92m and underlying PBT up by 7% to £8.3m and importantly net cash of £8.6m (market cap £59m at COP last night). In recent years the company has focussed its efforts on premium products for building and construction, especially water management and roofing and walling. Its products lend themselves particularly to modern designs and building techniques. The standard statements about Brexit appear; no impact so far and too early to call the long-term effects. Its products are led by specifiers and architects and are often bespoke so it has greater control over its destiny than makers of standard building products. As an indicator of what can be achieved even in difficult trading periods Alumasc is a good example of success and the improvement in building markets. The dividend is raised by 8% to 6.5p for the full year and the order book at £26.6m, 1% higher than last year suggests growth will continue. There are no hints in the text of what the board might wish to do with shareholder’s cash but, in our view, an acquisition splurge does not seem to be top of the list at present.
We believe the letter from Speedy is a sensible attempt to refute some of the allegations made by Toscafund in its attempt to get support for the removal of Chairman Jan Astrand and the appointment of David Shearer in his place. The timing of the letter is ahead of the last date for posting proxy votes which is 11am on Wednesday next and of course the meeting itself. The letter addresses seven points of contention between the two parties on which investors can make their choice. The only element upon which we comment is agreement with the last point, that Speedy’s recovery is well underway from what we can see and hear as outsiders; Brexit issues may delay the pace but the cuts in overhead costs, operational improvements and major contract wins suggest that earnings should start to improve once again on a sustainable basis. Whether we shall see more from Toscafund before the meeting is not known. The battle is very much about the view of Institutions who own large chunks of Speedy stock. The key developments are therefore likely to take place behind closed doors. Letters such as the one today are part of the armoury in these situations and quite normal; while the focus is on large blocks of votes in this case every vote counts of course, as we found on 24 June.
Grafton took the headlines yesterday with a 10% fall, a much larger decline than we had expected at 7am when we saw the news of a £20m exceptional for restructure and trading being good overall but not as expected a year ago, when the shares traded at around 750p. They closed at 548p last night. Forecasts are dropping at present from consensus at 45-47p to around 42-44p. Management is vaguer than investors might wish but when many input costs are being priced by companies owned by Euroland based entities (St Gobain, Knauf, Lafarge, Bosch) for sale in the UK, Ireland and Benelux there are complex issues to play out. Especially when much of the margin is governed by rebates dependent mainly but not exclusively, on sales volumes. We could write for a long time on the economics of Merchant’s supply chains but the things we do know are that for some 40%+ of sales (Selco and Ireland Merchanting) Grafton is in a very strong position as it is a very key outlet and for other sales it is important. It is therefore not without some power but price/volume trade-offs are complex. We expect Grafton will perform better than the new expectations suggest, the bar has been lowered a tad but investors must take a view on the macro first. Extremely competent management at Grafton can do a great deal but resisting the tide, should it turn for the worst, is not possible.
Carillion was surprise faller, down 4.4% to 260p. It goes XD today on the 5.8p interim payment. The shorts may have got their teeth into the stock or were careless on timing and with 3.7m shares traded yesterday there was representative volume. Our sense is that the robust nature of the current trading and the strength of the order book is not understood. Carillion is a support services operation that has some low risk construction work attached to it. The latent value is in services which, arguably, on an SOTP basis accounts for the whole of the valuation and the Contracting is for free. We exaggerate a little to make the point that the shares are potentially undervalued, despite the net debt and pension deficit.
Mears took first prize with a 2.9% rise to 455p, up substantially from a low of 363p on 24 June and at a time when little has altered, economically, in the UK, as yet. Brexit should have no effect on the markets in which Mears operates and its main customers in Social Housing are well funded, despite the reduced social rent revenues introduced last year which persist until 2019. The stock market needs to get a better grip of the nature of the company’s offerings in its main markets as earnings are growing and more robust than even current, improved rating recognises. Mears has adapted incredibly well to structural changes in its core Social Housing customers and the interims showed it will be pragmatic about progress in its Care markets. But it will not be not a pushover in Care and it has walked away from contracts in which it believes its approach to delivering value are different today than the clients. In our view, the stock deserves sustained support.
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