Market Commentary - Housing, Infrastructure, Construction and Services
There is no news this morning from sector stocks. A big note from Goldman on larger stocks in the Services sector may trigger a few price changes today. It was notable yesterday that G4S reached its highest level since early November last year closing up 2.1% at 239.8p. Forterra’s results meeting was very professional and solid.
There is no news this morning from sector stocks. A big note from Goldman on larger stocks in the Services sector may trigger a few price changes today. Zoopla’s trading update tells us it is trading in line and fails to suggest there are any cracks appearing in the housing market. Barratt was realistic in its view yesterday regarding a slowing of both house price rises and its own volume growth and that was sufficient to cause a small wobble among most housebuilders but as yet nothing substantial. Quite right as the current facts so far do not justify undue concern about the performance of the quoted UK housebuilders in the mid term.
The moves yesterday were in a tight band with SIG at the top, up 2.4% to 126.1p and Galliford Try at the bottom, down 1.6% at 1145p. SIG seems likely to trade in a band from 115p to 130p until it has news that moves it either way. The likelihood, in our view, is that it will rise north of 130p as its self-help measures kick in more strongly and new initiatives prove their value (Air handling, modular housing “systems”) but that is possibly more for next year’s detailed guidance and it’s too early for that. Galliford reports its finals next week.
It was notable yesterday that G4S reached its highest level since early November last year closing up 2.1% at 239.8p. Our support for the stock has, on occasions, looked questionable but the company seems now to be on a steadier track in terms of corporate revival. It has taken a bit longer than we expected but there is some momentum. The expected disposals are still work in progress from what we hear but it is reasonable to expect deals on the majority will be done by the year end, in time for the new FD. With peers on p/e ratios of 18-20x and G4S on EPS for this year of 15.5p there may be a valuation gap. Of course we need to aim off a little for the relatively adverse net debt position at G4S but nonetheless 300p a share, last seen in June 2015, seems to be a realistic target. At that level re-entry to the FTSE100 is a distinct possibility and that creates its own dynamic of course.
Forterra’s results meeting was very professional and solid. The story is very clear and the investment proposition is well explained. The company was wise to remind people of the fundamentals of the business and it will continue to do that as it does the rounds of investors this week and next. The share price appears to us to be at an unjustified discount when compared with the valuation of its rivals. While it may be said that Lone Star’s holding is a potential overhang, the investor’s remarks and actions have been about long term support for the business. Forterra’s business is a classic building materials business; volume sold, times unit price of the product less the costs of production and delivery. The key short term variable is volume and that we have not seen falling as the UK needs new houses and as the housebuilders know the preference is usually for a two/three storey dwelling with brick as the facing material.
The mothballing of the plants at Accrington and Claughton shows no real sign of ending and raised a few questions yesterday. Closing down is a £200,000 decision we were told yesterday and re-opening will cost around £300,000 but the savings along the way appear worth it. Re-opening is a separate decision for each plant as are, we guess, the decision to go ahead with the £2-3m of investment at each works, scheduled but not confirmed. Brick plants are built next door to quarries that have unique raw materials and those materials make unique products. Forterra’s decision to re-open is therefore also about whether it continues to manufacture certain types of brick, of which the Accrington product is probably the most widely known and used. While the topic of the closed plants attracted attention the mainstream issue of progress in the business was very positive and management’s progress in getting solutions to the issues it faces was very credible.
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