Edison Investment Research

Market Commentary - Housing, Infrastructure, Construction and Services

Lots of news this morning from the smaller stocks. Telford’s AGM statement, Lavendon and Workspace issued trading statements , and we have Bilby’s final results for the year to March 2016

Lots of news this morning from the smaller stocks. Telford’s AGM statement, Lavendon and Workspace issued trading statements and we have Bilby’s final results for the year to March 2016. They have one thing in common: they tell us it’s too early to assess the impact of the Referendum outcome. As a consequence, future guidance is limited. One feature of note is that in many cases there is an underlying message that guidance would be to push forecasts ahead, save for Brexit; that is a common feature of discussions with companies and Speedy was bold enough yesterday to give estimates a positive nudge. We cover each stock below.

One item slipped past quite unnoticed in recent days. Mitie’s AGM of course, held on 12 July. The company released the outcome at 17.46 on the day that showed support for most issues, on a 70% turnout, save for the remuneration report and the resolution on director’s ability to allot shares. Most companies take advantage of the AGM to remind the market of newsflow and other generally positive matters. Perhaps the good news for Mitie holders is that management saw no need to announce any concerns. At 242p at close, there is still limited enthusiasm for the stock and the buyback continues with 102,000 shares purchased yesterday, all for cancellation, among 1.1m shares traded.

First we saw the dramatic decline post Referendum for several days, then a small revival and now the harsh reality of slower growth might set in with interest rate sensitive areas of the HICS sector. Our sense is that there is limited enthusiasm to trade the stocks at present, save for when an institution decides it’s time to move out; shock moves therefore are more likely than ever to be down, not up, for a while. Mears was the best riser yesterday, up 2.7% to 390p but on a typically low volume. Given the noises from the new PM, social housing might be expected to be a priority and therefore Mears looks well placed. It has withstood recent share price battering very well, but many might say trading on c 11x current year earnings remains cheap. Polypipe and Kier fell around 2.6% to 240p and 1038p respectively, both above recent floors but well short of pre-Referendum levels. The case for Polypipe is better than the price suggests in our view, given that we suspect the volume of new builds will not fall and that the company has a large enough product range and sufficient new products emerging to allow it to offset a weaker RMI market. It is currently trading on 10x this year’s earnings.

Telford’s statement reminds us of the strengths of the business and not much else. The company still has the forward sales at £640m as it had at the finals on 1 June and has hardly touched the £50m of new equity raised due to PRS sales to L&Q and M&G. Interestingly, the company indicates that the forward sold position is so strong that it has no major sales launches planned until the autumn. The statement is exactly what might be expected at this stage of the game and in its own words is balancing short-term caution with planning the long-term growth of the business. That most likely means trimming land spend in both quantity and price and not recruiting and if necessary slowing build programmes and planning applications.

Lavendon’s first-half update is positive and its geographic breadth should provide some insulation from UK Brexit fears. In the six months to end June, revenue rose 11% at CER and ex fleet disposals, 15% at AER. The 7% rise in UK revenue (50% of the total) was a small surprise; however, there has been a concerted effort to invest in the fleet in the last 12 months, which is proving a successful way of winning market share. The company tells us that it is confident of meeting full-year expectations based on the first-half outcome and the breadth of its activity. Given the uncertainty, that may seem a little bold but suggests in the absence of Brexit, the company might have been nudging forecasts a tad higher.

Workspace provides a first-quarter update to end June. The l-f-l rent roll has grown 2.0% in the period and 4.9% in total. The company claims that the pace of letting across all properties has remained very strong. So no sense yet that this company is seeing greater caution, though it does not mention any reactions in the last week of June.

Finally, Bilby with its full year out-turn. Not many will have heard of the business, which is named after an Australian marsupial and is a buy-and-build vehicle in housing maintenance, especially social housing in the South East. We have met the company a number of times. Its practical, down-to-earth approach is working so far. The key issue is whether as it gets larger it can continue to obtain above average margins. It works directly for some Housing Associations and as a subcontractor for others. Unlike Lakehouse it is sticking more closely to what it knows best and to geographic areas in which it can provide some cohesion and step wise growth

Revenue slightly more than doubled last year to £31m and operating profit increased from £1.8m to £3.0m. Operating margins were in our view unsustainably high at 12.5% in the year to March 2014 so the fall to 9.4% last year is as expected, in our view and we see few reasons why they will not revert to a norm of 5-6% as the company gets larger. The company indicates it has visible future revenues of £240m and several contracts in the decision phase with customers. The key issue is of course whether it can succeed in translating it excellent performance as a small operation as it grows. Mears has succeeded in that but others, such as Connaught and Spice, have not. As outsiders it’s hard for us to tell at present but the management at Bilby is committed and cautious and the balance sheet is not extended. The company is aware of the impact of growth and has enhanced its financial controls and corporate governance but those are not the key, enhancing operational controls will be the main factor that will drive success. Controlling the areas where spending decisions are taken and time is spent by operatives is the crucial element of the next sage and is where others failed.

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