Market Commentary - Housing, Infrastructure, Construction and Services
McCarthy and Stone provide the only sector-specific news this morning in a trading update covering the year to end August; full year results will be released on 15th November. Completions in the period were up 20%, ASP was up 8% so revenue rose by 31% to £635m. BUT it has broken ranks with its housebuilding peers today and reports that there are some difficulties emerging in the market which other housebuilders have not indicated.
McCarthy and Stone provide the only sector-specific news this morning in a trading update covering the year to end August; full year results will be released on 15th November. Completions in the period were up 20%, ASP was up 8% so revenue rose by 31% to £635m. The company is doing what it said it would do when it returned to the public markets in November last year after near 10 years in private hands. BUT it has broken ranks with its housebuilding peers today and reports that
• There is some weakness in the secondary housing market
• Enquiries are up on the website but reservations are down in recent months
• Cancellations have risen
• Consumer sentiment improved in August but too early to know if it’s a trend
None of the above is quantified in any way but the company has added that prolonged weakness in the secondary market could affect the company’s ability to deliver the 15% volume growth target this year. Other housebuilders will update in the coming weeks and their findings will of course add to the emerging picture.
This McStone news is likely to impact the housebuilders today. The property agents have been indicating the second hand market is tough. Strong second hand values are key to maintaining pricing in the new sector. Clearly the sky has not fallen in since Brexit and the mainstream housebuilders report minimal impact, in most cases none so far. The volume of demand remains high and our concern is more about price than levels of output. Whether the McStone’s findings are specific to its target market, the “Last Mover” or early evidence of a more general trend that has not yet emerged. McStone’s potential customers motivations to move are wide and varied. It may be that those that do not need to move and who cannot now get the price they want from a tougher market (impacted by tax changes as well as Brexit) are staying put. Growing families and others who buy from teh mainstream housebuilders are in a different mindset, perhaps
HICS sector investors are likely to see a roller coaster of sentiment switch over the Autumn. The news so far is that trading appears unaffected by Brexit, though of course the economy is being boosted by monetary stimulus on a scale that dwarfs UK contributions to the EU. We have yet to see the The Brexit “Stress Test”, which will start in earnest this month as boards return, tanned and refreshed, to discuss recruitment and investment plans for the long term and 2017 budgets. The start point of the discussion in all cases will be that its too early to tell but our sense is that very few will be accelerating expansion plans and some will be stopping them. We know already that Morgan McKinley, the financial recruitment specialist reported in August that in July there was a 27% decrease in jobs available compared with the prior year. Any Brexit impact is likely to hit the London financial sector first and the reports of trading floors migrating to Frankfurt and increased competition from Asia in FX trading are not positive. We know no more than the average but experience suggests that sentiment switches will be frequent and McStone’s news today will trigger one of them
Toscafund responded to Speedy yesterday afternoon. The dispute is following the normal pattern for these types of events. Outsiders such as ourselves are best to stay silent and see what happens.
Galliford Try was the best riser yesterday, up 1.9% to 1156p; sentiment on the housebuilders will ebb and flow in the current quite volatile situation and GFRD’s earnings are mainly from its new build operations. Management is due to report full year earnings to end June on 14th September. The company has not flinched from its guidance for last year, which is for around 130p of EPS but might be wise to guide in a bit of caution for 2017 EPS consensus which remains at 147p. At the current consensus the business is trading on prospective 7.9x p/e and yielding 7.5%. The valuation looks cheap and we suspect the company will report strong results in a few weeks, especially in New Build but also in partnership homes, where it has JVs with several Housing Associations that are motoring ahead quite strongly. Galliford Try is far more than just a housebuilder and it should therefore not be quite as volatile as that sector.
Mears was the back marker yesterday falling 2.7% to 435p which we expect was due to recent high levels of demand for the stock tailing off a tad and is nothing to do with fundamentals; 36,258 shares were traded which is in line with normal average trading. At current levels the valuation is not stretched when compared with peers.
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