Market Commentary - Housing, Infrastructure, Construction and Services
Galliford Try is the main news this morning with its full year numbers to end June 2016 and Epwin has issued a positive first half report
Galliford Try is the main news this morning with its full year numbers to end June 2016 and Epwin has issued a positive first half report. GFRD has produced a 10% rise in revenue (Incl JVs) to £2.7bn and a 12% rise in adjusted operating profit to £143.8m. Looking at the headlines the company has done what it promised and the dividend is up 21% to 82p as EPS rose by 17% and the two are linked. There is still much room for growth at GFRD as it can expand revenue and has margins that are lower than many peers the reasons for which are not systemic but due to the stage it is at in certain parts of the business. On the Brexit issue the company is non-committal pointing to a brief hiatus followed by a return to “norm” levels of visitors and cancellation rates along with growth in sales rates and prices. More below
Rentokil was the best performer yesterday rising 1.2% as it regained some small losses from previous trading sessions and regained peaks seen first in early August. It represents a safe business model, in our view, with excellent growth prospects in markets for essential services. EPS at RTO of some 10p this year gives the stock a premium valuation versus UK Peers but it remains low compared with US rivals in pest control Rollins. Interserve was the weakest performer down 2.1% to 415p. The company has delivered little new news since the reassuring half year numbers and as a consequence of that and other factors has drifted a little in the last month. Unfortunately even at this low level of valuation (6.8x prospective p/e, based on consensus forecasts) the market as yet sees few compelling arguments to buy the shares. There is a good case to be made for the company but, for reasons we are not aware of, it is not being made.
Galliford’s performance was as expected as new CEO Peter Truscott finds his feet; his predecessor was always going to leave him a clean situation. In the Housebuilding operations, which comprise 93% of last year’s operating profit post central costs revenue rose by 8% to £841m based on dwellings completed increasing 11% to 3,078 units. The implied lower level of price increase and/or lower rate of land sales is small . The operating margin at 17.5% is a tad behind that of rivals partly due to a lower level of overhead absorption as it builds presence in new areas and partly due to the company being at the early stage of building a strategic land bank. Second half margin was 17.9%. The Partnership business (building homes for registered providers and others) showed a disappointing slowing of revenue growth, down 10% to £300m due to changes in the expected funding for the sector. We expect this is a temporary issue and the company points to substantial future growth. Our recent study of the top 20 UK Social Housing Providers showed that all of them have plans to increase new build over the next 3-5 years. In Construction The increase in revenue of 16% to £1.5bn but margin fell slightly to 1.1% due to legacy contracts being a continuing drag on performance, that will persist into 16/17; the operating profit in 15/16 was boosted by the sale of a small operation at a profit of £5.2m so the underlying operational picture was difficult.
The overall outlook for GFRD is positive. The results need to be looked at carefully of course but across all divisions the picture is one of strong demand and prospects for improved performance. Clearly views on the stock will be guided by investors beliefs about the future of the housing market. Net debt reduced to £8.7m from £17.3m this time last year so the company certainly has the firepower to grow. There may be questions at the meeting at 9.30am about the reduction in the size of the landbank to 14,500 units from 15,750 at end June 2015; the company uses the word appropriate to describe the situation but it is a tad smaller than that of rivals, compared with annual output. EPS for last year at 132.5p were slightly ahead of consensus from what we can see and based on current market outlook the company is well set for 145p of EPS this year, we believe. With the price at 1,133p at COP last night it appears to be too cheap to be true for many investors and the main doubts are about the markets.
Epwin’s growth looks to be very strong in the half year to end June with revenue up 16% and operating profit up 48%. The company is positive about prospects for the rest of the year. The growth came mainly from acquisitions but on a L4L basis revenue and operating profit were marginally higher than in 2015. Net debt rose to £30m from £2m last year to fund the deals. The company reports a dip in the markets for its products before and after the vote but provides no hard data. Further investigation of its experience is needed to understand read across. End user demand seems to have remained high so there may have been some destocking. Notwithstanding that observation the company points to progress in the rest of the year.
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