Market Commentary - Housing, Infrastructure, Construction and Services
Some interesting news today on several fronts. Purplebricks has issued an AGM update indicating that the outcome of the Referendum has had little impact on its business and that it now believes it has 65% of all on-line instructions. Redrow has announced that at its AGM it will propose a resolution to buy back up to 10% of its own shares. And if Redrow is about to reduce its exposure to the UK market waste management operator Biffa is about to do the opposite and has announced its intention to float.
Some interesting news today on several fronts. Purplebricks has issued an AGM update indicating that the outcome of the Referendum has had little impact on its business and that it now believes it has 65% of all on-line instructions. Redrow has announced that at its AGM it will propose a resolution to buy back up to 10% of its own shares and waive the obligation on Chairman Steve Morgan, who currently owns 40.4% of the ordinary shares, to make a general offer as required by the Takeover Code in the case of such a buy back. The company will buy its own shares if it is in the “best economic interest” of the shareholders and renew the resolution each year. The current proposal is that the waiver applies up to Steve owning 44.88%. It’s an interesting development triggered, it is claimed, by recent fluctuations in the share price. And if Redrow is about to reduce its exposure to the UK market waste management operator Biffa is about to do the opposite and has announced its intention to float. More below.
Costain and Interserve go XD today.
Galliford Try came back in strength yesterday with a 7.4% rise to 1215p. The analysts meeting, which we attended, was quite uneventful. The company clearly intends to be a tad more cautious with its cash in the next few years and will increase the level of dividend cover but at no stage is there an intention to reduce the level of payout. The expansion of the housebuilding operation appears to be the main goal, which will absorb cash of course, even if land can be bought at favourable prices and on deferred terms. There have been a largish number of new faces in the business since Peter Truscott became CEO and no doubt they will be making a significant contribution to the strategy update due to be released in February next year. The current plans, in terms of financial and other targets run out in 2018 and in any event a new CEO should want to set his own direction and Peter seems keen to do just that. Given that the stock is expected to create EPS of around 145p this year and the yield is around 7% the price at COP last night does not appear stretched.
Interserve was the back marker and fell another 4.1% yesterday to 397.9p. Indeed the trend yesterday was quite marked in that the main losers were stocks in which there are concerns expressed in the markets about the shifting of revenue and costs between years and other accounting concerns. Mitie and Capita were also fallers, both down 0.7%. HICS sector stocks, especially the services companies with long term contracts, must make judgements about revenues and costs that are spread over several years. Some organisations have generated more concerns than others. It may be a coincidence that on a single day these there were the back markers. But it is also the case that their valuations are below those of peers. We believe the market has become more efficient at spotting the issues which we highlighted some three years ago.
Redrow’s intended action is a new development in the sector, which in recent years has seen more dependence on quoted equity rather than less. The floats of McCarthy and Stone and Countryside were greeted positively. But valuations have been under severe pressure in recent times in the sector and while higher than in the post referendum phase are still below historic levels. And Redrow is a special case given its high level of owner driver ownership with Steve Morgan in charge and also the holding of Toscafund at near 10%. Steve has tried to buy the company for his vehicle Bridgemere once before and failed. With the price at 390p last night after delivering EPS of 55p in the year to end June 2016 the level of frustration must be high. The return to shareholders from buying back stock versus reinvesting in land is quite fine and needs to be done later today. The longer-term intention would appear to be clear though options are open and having sold Wolves recently it may be argued that Steve has cleared the decks. The announcement today should be positive for Redrow’s price and the sector in general
Purplebricks is very positive today about the market and its own prospects. We shall focus on the former. The company has indicated that instructions are up 121% year on year and continue to grow each month. Clearly some of the increase might be due to a migration away from conventional Estate Agents to the Purplebricks one and on-line in general. However, the indication is that there is a high level of demand for its transaction platform due to market activity levels as well. The data from Purplebricks suggests that pessimists like us are so far incorrect, the Referendum is not affecting the UK housing market. Logically with high price to income ratios it should but it’s still early days and interest rates have fallen since 23rd June!
The ownership of Biffa has been in flux for several years so the intention to float is no surprise. It is included here as several sector stocks compete with Biffa in the Local Authority Environmental services space (eg Kier, Serco) which comprises near 20% of Biffa’s revenue. With revenue of £930m in its most recent year of operation to end March 2016 and EBITDA of £122m the company is a candidate for FTSE250 entry. £270m of new money (gross) is to be raised and we shall look in more detail at the situation later this morning
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.