Market Commentary - Housing, Infrastructure, Construction and Services
Forterra has released its maiden half year results today following its float in April this year, Barrattt Development has issued full year results and Ashtead its first quarter data. The common thread in all three is that trading July and August was “business as usual” and at Forterra and Barratt revenue was ahead of last year in those two months. The moves yesterday saw Homeserve start seriously to test the 600p level, rising 1.7% to 580p at close having seen 590p at one stage. The main losers included three stocks that have had good support recently, Mears, down 4.3%, Carillion down 1.7% and Interserve down 1.4%; the moves were not much more than ebb and flow of trading, in our view. More significantly Grafton fell a further 1.6% to 512p and is now down over 15% from the closing price the day prior to its recent results on 31st August.
Forterra has released its maiden half year results today following its float in April this year, Barratt Development has issued full year results and Ashtead its first quarter data. The common thread in all three is that trading July and August was “business as usual” and at Forterra and Barratt revenue was ahead of last year in those two months. Clearly more information is needed to understand the impact of Brexit and management teams remain cautious. In housing there is a sense that the main players slowed activity substantially in June as they had done what they needed to get to their half year or full year targets by end May so it was “feet up” for a while. Whether Brexit has really had little impact or something else is happening that may be temporary we have yet to see. More below.
The moves yesterday saw Homeserve start seriously to test the 600p level, rising 1.7% to 580p at close having seen 590p at one stage. It was the biggest riser in our HICS focus group of 22 stocks. Our reservations about the sustainability of the economic model at HSV persist but at present it is delivering growth in the US. There is a lot about the stock which suggests it’s a “greater fool” play. The trouble, as always, is nobody knows quite when it will run out of road! In the UK the expensive downsizing coincided with the mis-selling probe and the underlying picture was less clear than it might have been.
The main losers included three stocks that have had good support recently, Mears, down 4.3%, Carillion down 1.7% and Interserve down 1.4%; the moves were not much more than ebb and flow of trading, in our view. More significantly Grafton fell a further 1.6% to 512p and is now down over 15% from the closing price the day prior to its recent results on 31st August. As we have suggested the unexpected £20m exceptional cost has raised more concerns than anticipated. We feel it is disproportionate, too vague in terms of cash usage and payback is too long. Some observers may see the current pressure as buying opportunity with consensus (underlying) earnings still at around 45p a share for this year.
Forterra’s numbers show a relatively flat performance on the pro forma basis supplied by the company. Revenue was down a tad at £146m, 3% lower than last year and “clean” EBITDA was down 1.5% at £40m. It has declared a dividend at 2p a share and with net debt lower than expected at £118m the payment is affordable. It has been a tougher start to life back in the quoted arena as the brick merchants have been destocking and that affected delivery volumes; that is evidenced in the share price which closed last night at 166p against a float price of 180p. The market’s assessment of value is rather harsh, in our view, given that the company delivered 12.5p of EPS in the first half and is on track for around 23p for the full year. Forecasts for 2017 are a little cautious and some show a slight dip in EPS but a prospective p/e of 7.5x is low by most comparisons, even if there is a bit of a stock overhang. The company has mothballed two plants since the Referendum and is bringing on stream new, low cost production at a new plant at Measham which should position it well in the longer term. We shall attend the meeting later this morning and report back. The valuation compared with equivalent stocks such as Ibstock and Marshalls is hard to justify and present a good opportunity. This is a good set of numbers from Forterra and there is better to come in the mid term, especially, as we believe, the volume of new house build is unlikely to dip and is far more likely to increase significantly, using brick as the main facing material.
Barrattt’s revenue in the full year to end June rose by 13% of which 5% was additional volume (to 17,319 units) and the remainder was better ASP driven mainly by mix and location. Operating margin remains among the lowest at 15.8% though its approach of having a faster turn on land than rivals has allowed ROCE to rise to 27%, up from 24% last year. The company ended the year with net cash of £592m and so is fully able to pay the 19% rise in the final dividend to 12.3p a share and a special of 12.4p. The company is on track to deliver the promised 96p a share over three years to 2017 having paid out 38p and now promised a further 25p by end November 2016. Looking at the performance numbers the business is in good shape. It bought 24,387 plots in the year, well ahead of output in the period and taking it nearer its target of 3.5 years production in the landbank. It is investing in strategic land but is not as lively in that area as some others. The year has started well, we are told, with reservations 4% higher than last year and sales rate at around 0.7. EPS at 55p is a tad ahead of expectations but as stated earlier we have the sense that many companies tuned the numbers in June this year to what was needed rather than maximising last year. At 500p at close last night and with 55-58p of EPS expected this year the stock trades on the long term norm p/e for the subsector of 8-10x; it is nearer the top end of the range perhaps due to dividend payments being higher than historical levels.
Ashtead’s numbers are in line with rental revenue up by 12% and EBITDA by 9%. EBITDA margin at 48% is at a record level and its hard to see that can get much better. We look at Ashtead for read across to the UK plant market and it showed sales in the first quarter to be 7% higher than last year in the period and EBITDA to be 6% up at £36m, a margin of 38% which is higher than its UK rivals. Rental only revenue in the UK was up 15% to £75m due to increased fleet size and flat yields; that pace is ahead of the market’s growth. A Plant’s performance is also ahead of those of Speedy and HSS and that will no doubt inform the Speedy EGM on Friday. Ashtead’s UK operations are now the biggest in hire in the UK. The market trends of increased levels of hire and market share gain from the smaller operators seem to be continuing; there is no hint in this statement that A Plant is taking share from its quoted rivals but that is a question that will be asked of course.
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