Market Commentary - Housing, Infrastructure, Construction and Services
John Laing Infrastructure (JLIF) provides the relevant news this morning. Speedy’s EGM resulted in stalemate with the Chairman retaining his role with support from 63% of the voting shareholders and David Shearer getting support to become a Director from 53%. On Friday last we saw only one riser in the sector, Serco, up 0.2% to 132.3p.
John Laing Infrastructure (JLIF) provides the relevant news this morning. The numbers are as we expected with growth in the portfolio and NAV at 113.8p, up from 108.4p in December; the shares closed at 133.3p on Friday and are yielding 5.1% on the expected 6.8p dividend for this year (EPS 8.4p in the six month period reported). Importantly JLIF is finding new infra projects in which to invest, at appropriate levels of return but there is a lack of opportunities in the UK, despite all the talk of the importance of infrastructure investment. More below. The only other news of relevance is the continued fresh data and debate about UK housing which will continue until the Autumn Statement.
Speedy’s EGM resulted in stalemate with the Chairman retaining his role with support from 63% of the voting shareholders and David Shearer getting support to become a Director from 53%. The process is probably incomplete although David is now on the board, details yet to be released and there is no news on whether the Chair regards 63% support as a sufficient mandate to continue. It remains to be seen whether the board can be workable in this situation or not.
News later this week is provided by Galliford Try which has its Finals to end June 2016 released on Wednesday and Purplebricks, which has its AGM on Thursday. Clearly both will provide front line information on UK housing. GFRD should be able to draw attention to its good performance in Partnership Homes and Construction as well as it private housing operations.
On Friday we saw only one riser in the sector, Serco, up 0.2% to 132.3p. The news from the ECB which pulled down the market on Friday last after a bright opening is expected to have similar negative effect today. The best performers in the last trading session were those with stable income streams, not likely to be affected much by interest rates. The largest losers were SIG, down 4.1%; Grafton, down 2.9%; and Travis Perkins, down 2.4% as the Materials Distributors are seen as highly vulnerable if building work slows. Investors are reassured by the current sector mantra (“short term uncertain, long term we are well positioned for growth”), but it’s not enough in many cases to create a compelling set of reasons to buy. The harsh reality is that Brexit uncertainty might persist for a while and while economic data to date have been better than expected (save for sterling down 10%) there are few reasons to believe it will get better, in the absence of any government stimulus. Perhaps the market is just getting a tad nervous that the Autumn Statement will not contain sufficient stimulus to justify current trading prospects.
The main theme of the JLIF announcement is practical realism. The board might be a tad nervous that the shares are trading at a substantial premium to NAV, which was recently as high as 25% but at COP Friday was 17%. The statement today indicates that growth will continue as there are sufficient opportunities and that it will resolve issues in some health sector projects. But there is real caution expressed about the lack of UK projects and oversupply of capital. The company is seeking overseas projects at a greater rate than before and probably ones at an earlier stage as allowed now by its mandate, but it is good news for investors that management is assessing fully the different risk characteristics. Overseas projects offer superior returns, we are informed, but the risks are not the same as the UK. All of that caution should not detract from the improvement in the six months to end June which saw the rise in NAV mentioned earlier and the fair value rise some 16% while shares in issue rose by just 10%. Infra Co shares have done well in recent weeks due in part to their solid performance and in part due to the search for yield. The message today is probably that the company can provide what investors want but growth will be steady not spectacular as management is not willing to take undue risk. The rise in the dividend of just 1% shows that caution as well as the words. As an asset class the Infra Cos are rightly popular and JLIF’s track record shows why it is trading at a strong premium to NAV and relative to its peers and should remain well valued.
Last Week’s Moves
The sector fell by 2.5% last week against the market down by 1.5%. YTD the sector is showing very different performances with Housing level for the period, Construction and Materials up by 15% and Services up by 5%. The market is up by 8.6% (FTSE100) and 7.5% (FTSE All Share). Overall sector investors are down a little and out performance will have been achieved mainly with a portfolio overweight in US biased stocks, such as Wolseley (up 16% YTD) and Rentokil (up 37%).
The main riser last week was G4S, up 2.6% after favourable comment and a growing realisation that the business has probably turned the corner in both trading and balance sheet improvement. The shares need to rise to near 300p for the stock to be a candidate to re-enter the FTSE100 but that is a distinct possibility looking at its valuation versus rivals and earnings growth prospects.
Grafton was the worst performer as it is still reeling from its unexpected £20m exceptional costs. In a sector that has more than its fair share of accounting issues shocks like the one Grafton delivered make investors nervous. It has been treated as if it was a major profit warning and there may be concern that there is more to come. We believe the market is probably over reacting as trading conditions are still positive. At 502p at close on Friday and with the range of forecasts for this year at 42-45p of EPS Grafton is the cheapest it has been for some time, apart from the collapse immediately post the Referendum.
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