Market Commentary - Housing, Infrastructure, Construction and Services
There is no directly relevant news from HICS sector stocks this morning. The Speedy Hire EGM takes place later this morning when shareholders will vote on two issues. Speculation about the contents of the Autumn Statement are appearing more frequently along with reports that while we may avoid a recession, we are certainly heading for a Brexit slowdown.
There is no directly relevant news from HICS sector stocks this morning. Victoria has issued a trading update that we view as positive. Buying carpets is linked to house moves and confidence in housing. The company provides no data but tells us that it has seen no fall in demand from its customers post the Referendum.
The Speedy Hire EGM takes place later this morning when shareholders will vote on two issues, the removal of the current Chairman Jan Astrand and the appointment of David Shearer to the board. The outcome will probably be clear later today. The vote may need to be interpreted a little as it could be different for each resolution. And even if Jan Astrand gets enough support to remain in post, the level of backing for him may be an issue. Our thoughts at this stage are; firstly, that the outcome may not be clear cut and, secondly, and most importantly, there is no suggestion that Speedy is anything but a good business that is capable of further improvement. Therein lies an opportunity for new investors. The issue today is about who will lead it and the pace and shape of improvement. Ashtead’s numbers for the first quarter demonstrate what can be achieved in UK plant hire in terms of growth and EBITDA margin.
The sector is seeing a relatively benign period as we await the Autumn Statement. The best performer yesterday was Galliford Try up 2.8% as the housebuilders received some support and perhaps in anticipation of strong preliminary results next week. We note that Grafton had its first positive day since the half results were released last week rising 1.3% to close at 518p having spent much of the early part of the trading session in negative territory. The selling post results was probably overdone as the trading numbers were comparable with those of rivals but the £20m restructure was a shock to us. Wolseley was the backmarker, down 1.1% to 4398p mainly due to trade flow on the day though FX moves in the last two days, especially £/$, will have an adverse impact on the translation if they persist.
Speculation about the contents of the Autumn Statement are appearing more frequently along with reports that, while we may avoid a recession, we are certainly heading for a Brexit slowdown. There is no doubt that recruitment and capital investment decisions are being slowed or changed and not just by boards based in the UK but also elsewhere. The UK received some 50% of all inward investment into the EU in recent years. There is little to no evidence of higher inward investment because of the outcome of the Referendum. Any package of measures is likely to include boosts for Infrastructure and housing. Funding via PF2 may be a feature. Any measures should benefit sector stocks though of course there are few “shovel ready” large infrastructure programmes. If the focus is on regeneration, schools and the health sector Morgan Sindall, Galliford Try and Kier should benefit more than most rivals but others will gain as well.
The conundrum in housing is that the main housebuilders own and control much of the available housing land so increasing the rate of build in the short term requires incentivising them to build. So far that has happened through demand side measures (eg Help to Buy). Boosting production by direct intervention has been spoken of but would be inconsistent with free market thinking. We may see Local Authorities being given a bigger boost to free the land they own and build on it, using direct measures but involving the private sector. The other element is the lack of available skills and the only real fresh thinking at present is by Laing O’Rourke which has invested factories using in “Modern Methods of Construction” and to a lesser extent L&G which has spent £55m on a modular housing plant. Persimmon uses its Space 4 plant for around 20% of its output but other housebuilders remain wedded to traditional construction, requiring on- site skills, as the ROCE from factories is less than it is from the mainstream operations.
The impact of the Autumn Statement is unpredictable at this stage but there is no doubt it will be positive for the HICS sector and that outcome does not seem to be present in current sector valuations, for contractors, distributors and materials stocks, in our view.
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