Market Commentary - Housing, Infrastructure, Construction and Services
The news from housebuilders Redrow and Berkeley this morning regarding trading since the Referendum is positive; the former has released its full year results to end June 2016 and the latter a trading update to coincide with its AGM which takes place later today. Severfield also has its AGM later today and has told us that it is trading in line with expectations. The early conclusion is that, absent long term population decline in London as a consequence of Brexit, which could easily happen if financial services companies leave the capital as is likely without passporting, the housebuilders remain confident.
The news from housebuilders Redrow and Berkeley this morning regarding trading since the Referendum is positive; the former has released its full year results to end June 2016 and the latter a trading update to coincide with its AGM which takes place later today. Severfield also has its AGM later today and has told us that it is trading in line with expectations.
The headlines from the two housebuilders are that demand remains unchanged by Brexit, so far, that the land market remains benign, that build costs are contained and rates of return can be sustained. The common feature of both releases is that the London market has taken a severe impact from tax changes, more so in the £1m+ part of the market than below. The suggestions being that, firstly the impact will have a ripple effect on the rest of the UK in time and secondly the tax take will be lower than it would have been in the absence of the substantial change. The early conclusion is that, absent long term population decline in London as a consequence of Brexit, which could easily happen if financial services companies leave the capital as is likely without passporting, the housebuilders remain confident. More below
Yesterday’s moves provide limited data for the future, in our view. Carillion was the best performer, up 3.4% to 270p as the new contract with Centrica provided some increased confidence. But the news does not alter the fundamental drags on the share price. Mears was the weakest performer, down 4.0% to 456p as recent strong support faded, as it does in the ebb and flow of trading and there probably was a bit of profit taking. More significantly Grafton and SIG were down 1.8% and 1.5% as concerns about Merchants persist. Volumes in housebuilding seem unlikely to fall in the mid term and indeed seem more likely to rise but trading conditions are usually said to be challenging in Materials distribution and there is no real change on the horizon. It may be that both stocks are oversold as their efforts to reduce costs and improve efficiencies should more than compensate for market conditions.
Redrow’s numbers for last year are predictably very positive and in line. Revenue rose 20% to £1.4bn, volume and prices increased 17% and 7%, respectively; land sales at £21m were lower than the £65m achieved in 2014/15. The operating margin rose to 18.9% from 18.5% mainly due to the GM increasing as a consequence of more production from recently bought land entering the mix, offset slightly by a higher proportion of social housing. Net debt fell to £139m from £154m, which is the right direction, of course, although the company is not dashing to reduce that figure; there are too many good growth opportunities ahead to squeeze the balance sheet at this stage. Redrow is not promising large chunks of change for shareholders just yet but raised the dividend to 6p at the final, up 67% on last year at 10p. The more remarkable number is that the owned and contracted landbank is 43% higher at 26,000 plots, around five years’ production so the scene is set for more expansion this year and as the land is bought at today’s level and most legacy land is out of the system margins should rise comfortably in the future, all other things being equal. The PBT was at a record level of £250m and the EPS reported last year at 55.4p was a bit ahead of expectations and 24% higher than 2014/15. We suspect that all but the most pessimistic of analysts will be raising forecast for the current year for Redrow based on today’s news and consensus EPS for the current year will climb over the 60p level. The shares closed last night at 384p which looks low compared with the valuation of rivals, albeit that Redrow’s dividend is well below the average.
Berkeley’s announcement takes a bit of understanding. It said some months ago that reservations were down 20% in the year so far as a result of changes in demand and a deliberate slowing in production and availability. The news today is that the 20% reduction has not altered in recent months. The company also tell us that site visit number and enquiry levels are unchanged on last year but getting buying commitment is taking longer. Pricing and cancellation rates remain resilient and the latter has returned to a normal level following a post Referendum hiatus. In most respects the news from Berkeley is exactly as expected and the broader economic concern about the negative impact of tax squeezes on the London market are getting louder; it’s not just Stamp Duty but also other impositions such as the Community Infrastructure Levy. History tells us that Berkeley is usually right when it comes to judging what will make the housing market improve.
Severfield’s strong revival continues. The only real data in the release today is the order books which at £268m for the is about the same level as at 1 June when it was last reported and in India is £4m higher at £37m. The company does not mention Brexit but the numbers suggest it has had no impact so far and the range of sector served means it has options outside of structures to support large building in the City. The consensus forecast of 4.7p of EPS for this year and 5.8p for 20117./18 suggest that the valuation at close last night is not overstretched with a share price of 57p.
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