Market Commentary - Housing, Infrastructure, Construction and Services
As in previous weeks recently the week has started quietly with only Carillion providing new news today with the announcement that Centrica has appointed it preferred partner for a £90m, 5+2 year contract to provide wide ranging FM and project services. The housebuilders will be the main focus in the week ahead. Redrow’s Prelims will be released tomorrow and Berkeley Group will most likely update to coincide with its AGM that day. Barratt Developments will release its Finals on Wednesday. The housebuilders will not get it all their own way in terms of expected news this week, Severfield has its AGM tomorrow and is likely to update, Ashtead has it AGM and Q1 update on Wednesday and on Friday we will get news later in the day of the outcome of the Speedy Hire EGM
As in recent weeks the week has started quietly with only Carillion providing news today with the announcement that Centrica has appointed it preferred partner for a £90m, 5+2 year contract to provide wide ranging FM and project services. This is one of three contract renewals due for re-bid at present; Nationwide and Openreach are the other two. Good news for Carillion though, within the context of annual revenue approaching £3bn, this one contract is not substantial, however, the re-win is significant. Carillion is the largest FM company in the UK by revenue and its market position is being strengthened by its wins , its continuous operational improvements and by its investment in the Holy Grail for the sector, a effective IT and technology system to manage and control workflows and people. There is no obvious silver bullet to resolve, at a stroke, either the pension deficit or the net debt issues which are, in our view, the main drags on the share price and cause the circa 20% level of shorts on the stock. But equally there is no obvious catalyst for collapse so the shorts may need to continue to be patient with what is one of the most expensive positions to run in the HICS sector (dividend currently 7.4%). The shares closed at 26p on Friday last, valuing the company at prospective p/e of 7.4x.
We are not experts in property stocks but always look at their views for read across. London Metric has announced today that it has sold a retail park in Warrington at a 5.4% Net Investment yield (NIY) and bought a distribution warehouse in Hemel Hempstead on a 6.1% NIY. The company has been shifting its portfolio towards distribution for some time and it is one of the most the most fleet footed of the property stocks. London Metrics shift towards logistics hubs and away from retail is ongoing. The implications for retail fit-out and for warehouse construction and fit-out are clear, if London Metric are right about demand patterns.
The housebuilders will be the main focus in the week ahead. Redrow’s prelims will be released tomorrow and Berkeley Group will most likely update to coincide with its AGM that day. Barratt Developments will release its Finals on Wednesday. The main themes will of course be that it’s still too early to judge effectively the impact of Brexit and that longer term demand is still likely to exceed supply so housebuilding is a good place to be. But just over two months on from the Referendum there should be some hard data to guide thinking on the sector (footfall, website hits, sales rates etc) and the Autumn selling season has just begun. Of course Berkeley Group will be the main focus of attention but Redrow is likely to be the most interesting stock at this stage given its growth potential and wide geographic coverage.
The housebuilders will not get it all their own way in terms of expected news this week, Severfield has its AGM tomorrow and is likely to update, Ashtead has it AGM and Q1 update on Wednesday and on Friday we will get news later in the day of the outcome of the Speedy Hire EGM
The star turn on Friday last was Atkins, up 3.9% to close at 1565p, the highest level since January this year and not far from the peak close in December 2015 of 1626p. It may be that the City is finally getting the message that ATK is extremely well placed in its markets, which are growing well. The company’s guidance is always cautious so the consensus of 115p of EPS for 2016/17 is, we believe, on the low side of the likely range of outcomes. The favourable impact on earnings of increased workload in Infrastructure, the PTT acquisition and FX will be positive for earnings and may be accompanied by other favourable trading.
SIG was the backmarker as IKO appears to have bought all it wants for now and no new buyers have yet emerged in size. The stock fell 1% to 125.9p. The company clearly has not yet created a compelling case for it approach to the opportunities ahead and in valuation terms, especially EV/Sales, is substantially lower than its peers. There are no clear catalysts for change at SIG other than sector consolidation.
Last week’s moves
The sector still trails the market with Housing up 3% YTD and Services up 7% versus the market up 10%. Construction and Materials are up 18% YTD boosted by US dependent CRH, the largest component of the weighted index, supported by Balfour Beatty which has done well in recent weeks.
The 11.6% decline in Grafton was the main change last week. We did not expect the £20m restructuring charge and neither did the market, in our view. The company told us that a radical response to ongoing conditions in Plumbing and heating markets was needed but the size of the number is large, the applications of the money vague and the payback (3.5 years) too long. The concern is that a very good business story is being spoiled a little by a blip in trading in one segment, in which it is not the only company affected. The write-off distracted attention from the recovery in Ireland and the strong performance at Selco. Underlying EPS of 45p is expected this year (22p at the halfway stage) but forecasts have trended down a little since the 31 August and there are lower numbers in the market than 45p. The shares closed at 530p on Friday. It has not suddenly become a bad company and it is trading well across most of what it does but shocks like a big round number exceptional charge do not help company credibility.
Babcock was the best performer last week, up 5.5% on no news. As with Atkins, up 4% last week BAB shares have quietly crept northwards from a post Referendum low, in its case 869p on 27 June. The market is becoming accustomed to the drawbacks of the brave decision to buy Avincis and the short-term financial consequences, which were not greatly favourable. It is also clear that in its work in the MoD and in nuclear the company is doing rather better than hoped. With 82p of EPS expected this year the share price at 1,091p does not look overstretched by comparison with its peers, in our view.
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