Market Commentary - Housing, Infrastructure, Construction and Services
It promises to be a quiet Friday with no new news and the market expected to be subdued. Miller Homes issued an interim report yesterday for the period to end June 2016. The company pulled its float last year. It reported no discernible impact from the Referendum, so far. The mood among investors in the sector yesterday was safety first.
It promises to be a quiet Friday with no new news and the market expected to be subdued. The Hinkley Point go ahead, announced yesterday, is clearly good news for the sector and especially for Kier and Babcock. The project will of course suck in resource from the contracting sector as whole in the UK and that will start at a time when the government’s plans to reduce immigration could be having an impact. The comments yesterday from Network Rail’s CEO about a need to increase off-site construction to lower cost and improve quality could be timely in the context of a looming labour shortage in the sector. In the new build sector in particular we are surprised at the slow take up of modular construction and the virtually negligible use of volumetric product. In the quoted sector SIG’s moves to build capability in the modular area and Persimmon’s Space 4 product are the only real efforts that are getting investment and show success.
Miller Homes issued an interim report yesterday for the period to end June 2016. The company pulled its float last year. It reported no discernible impact from the Referendum, so far. On all main metrics it was on track with the sector, sales rate at 0.75, ROCE 30%, revenue up 11% on volume up 6% and ASP up 1% (the balance being land sales) and operating profit up 36%. The net margin at 17.4% is at the lower end of the range but that will improve as more recently bought land comes through. The company is going for growth, as the doubling of land spend in 1H16 to £80m shows but with just over 1,100 units built in the first half its efforts alone will not be enough to change the dynamics of the benign land market.
The read across from Miller confirms the view about the UK housebuilders and current conditions. But rating are low as the market as ever is looking ahead 18-24 months and sees a weaker picture at present. Whether Miller will float remains to be seen but certainly the release yesterday indicates that management wants to keep that option open. Miller Construction was bought by Galliford Try. The current footprint of the Miller Homes business bears a strong resemblance to the geographic expansion targets of GFRD. So Miller may have a few options ahead.
We had a small typo yesterday. Biffa’s annual revenue in the year to end March 2016 was £930m not £30m. The former is much more consistent with EBITDA of £122m! We suspect that in the current climate valuations of £1bn on flotation, as suggested are on the high side especially as the free float might be lower than 30%.
The mood among investors in the sector yesterday was safety first. Compass and Berendsen were the best performers with gains of 2.1% and 1.6%, respectively. Both stocks operate in areas of essential services and have a large number of small contracts, across many sectors and so are not dependent on specific swings in demand and pricing. At the other end of our league table of HICS stocks Interserve fell 2.5% (9.8p) as it went XD on an interim dividend of 8.1p and was the largest faller and Mitie was the second worst performer down 0.8% to 263p. Both of these stocks are failing to get any consistent traction in the market. Based on consensus forecasts they are trading on low prospective P/E ratios of 5.9x in the case on Interserve and 10.3x in Mitie’s case. The market seems to have little appetite for stocks delivering general FM services at present. An amount of work is needed to reassure investors about long-term work in FM which has shown consistent margins of 5-6% over many years with a very good ROCE. The historical accounting behind some companies has not aided sentiment. But we believe that with more reassurance the companies that expense mobilisation and bid costs and have demonstrated consistent earnings (not just consistent adjusted earnings) should have better ratings than they do. The certainty and longevity of earnings in FM is underestimated, we believe.
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