Market Commentary - Housing, Infrastructure, Construction and Services
News today comes from Speedy Hire and Michelmersh. On the issue of Brexit Michelmersh concludes it is too early to know the long-term impact but, somewhat curiously then adds that the outcome of the referendum will have no material affect on the near-term financial results or future growth prospects. What we do know is that there is a short-term hiatus as the PMI figures last week indicated, that recruitment is reducing and that prices are likely to rise in response to sterling’s decline, as is seen at the petrol pumps already. News this week comes from Keller’s AGM tomorrow, Taylor Wimpey reports interims on Wednesday, on Thursday Rentokil has its interims and Compass provides an update and on Friday Berendsen reports its half-year results.
Market Commentary - Housing, Infrastructure, Construction and Services
Monday, 25 July 2016
News today comes from Speedy Hire and Michelmersh. At Speedy Toscafund has requested an EGM to propose that Jan Astrand steps down and that David Shearer is appointed as a director. The board of Speedy has announced that the meeting will be requisitioned and convened with 49 days. Michelmersh has delivered its half-year results to end June 2016, which are in line with expectations and the experience of other sector companies. Brick volumes remain steady and the substantial price rises posted across the industry in 2014 and 2015 have abated and given way to a 2% increase in the first six months of 2016. Lakehouse has announced that founder Steve Rawlings has sadly passed away; that probably helps make more sense of the board upheaval of recent months and the appointment announced last week of Bob Holt to the role of executive chairman. More below.
On the issue of Brexit, Michelmersh concludes that it is too early to know the long-term impact but, somewhat curiously, then adds that the outcome of the referendum will have no material change on the near-term financial results or future growth prospects. That just about sums up what many are saying. We don’t have a clue what Brexit or ‘Brexit means Brexit’ means and neither do the politicians. But we will be OK in the long term. Companies are left to say soothing words that they are flexible and can adapt. Michelmersh has gone a little further than most in saying Brexit will have no impact on long-term prospects, which is brave.
What we do know is there is a short-term hiatus as the PMI figures indicated last week, recruitment is reducing and prices are likely to rise in response to sterling’s decline, as we can see at the petrol pumps already. And as I can attest after a week in France, eating out there is getting a tad expensive. The construction sector cannot escape short-term impacts on projects as funders will be more cautious and that could cause delays. The housing market will most likely be affected in the short term and we shall learn more on that from TW on Wednesday (interims) and from one of the biggest lenders to UK housing, Lloyds Bank, on Thursday. We also have news from Capital and Counties on Tuesday, Rightmove on Wednesday, Countrywide on Thursday and Foxtons on Friday, which will help form views on housing market progress. Clearly we are in ‘Phoney War’ at present, the outcome of which is far from certain; caution will remain for good reasons.
News this week comes from Keller tomorrow at its AGM, Taylor Wimpey reports interims on Wednesday, on Thursday Rentokil has its interims and Compass provides an update and on Friday Berendsen reports its half-year results.
We missed last week due to planned leave. The update from Babcock and interims from Howden and Breedon appear to have been well received. In the case of Babcock there is no real reason for it to have been affected by Brexit, given the nature of its work for the MoD and diversity outside the UK; the stable order book and pipeline are evidence used by the company but after just one month they were always unlikely to be changed. The company had a local difficulty over pay and rations at the AGM, which distracted a little from the investment case. Breedon’s exposure to major infrastructure works and the roads programmes are likely to help it through the Brexit hiatus more smoothly than most and the higher cost of importing heavy-side materials might benefit the company, offsetting some of the increased cost of fuel. Howden has a more difficult case to support as it says it can be flexible, but higher distribution and raw materials cost due to sterling weakness and the discretionary nature of its customers’ spending patterns means it may see more impact than most.
Last Friday saw Berendsen’s progress continue at pace. It rose 0.8% to close at 1,320p. The flight to safety and geographic diversity has aided the stock and will continue to do so. But with EPS of c 63-65p expected this year (the variation is in part due to FX rate assumptions), the valuation is looking a tad stretched even by current standards. Morgan Sindall was the back marker, down 3.9% at 562p and with 213,609 shares traded we cannot say volume was unrepresentative. The price is too low in our view. The company will report next week that it is doing pretty well in most of its operations, in fact very well in some and that only Fit-Out might be affected by Brexit, due to potentially lower volumes over the next few years. With 75p of EPS expected this year the stock is too cheap; the 85p of EPS pencilled in for next year looks vulnerable if volumes drop in Fit-Out and we think the company will be cautious in its view on that. A key metric will be whether it has seen an increase in cancellations so far.
The call for an EGM at Speedy is arguably a bit harsh and hasty given that the new top team has been in place for just over a year (CEO) and less than a few months (FD). Controversially the chairman has also assumed an executive role for a long period while not necessarily always being in the UK. As outsiders we have seen much good change occur at the company in the last 12 months and a sounder base established, though it has lost its number one position in the hirers league table, based on revenue. The real issue might be about the pace of improvement and/or the willingness to engage in discussions about industry consolidation. The call for an EGM may be following discussions with Jan Astrand the current chairman which have not proved helpful to Tosca. The timing is not helpful for the business of course but the view must be that a a speedier pace of change in the industry and at Speedy will help investors.
Michelmersh Brick has been cautious in its interims in terms of the financial results, we suspect. Average selling prices rose by 2% and volumes were flat so the 4% fall in operating profit to £2.6m was a surprise but we are told there were short-term production problems at one site that raised costs. Those problems are now resolved! As with Forterra the company indicates the brick market is competitive but we also know there is the benefit of factory cost-reduction programmes still to come through at Michelmersh and with other manufacturers. The housebuilders are getting better at procurement, as they said they would. It remains to be seen whether the long-promised increase in UK housebuilding happens soon. The logical consequence of reduced immigration is that the housing pressure will abate, in time. Our sense is that Michelmersh is very well placed geographically and in terms of future production costs and raw materials. The key issue, long term, relates to the demand for housing in the UK. And that is something that Take Control cannot govern.
Last week’s moves
The sector rose a little last week, up 1.3%, which was a little slower than the market’s 1.6% rise. The housing sector fared a little less well than contractors and materials and services and rose just 0.5%, holding back the overall sector picture. Year to date the sector is up slightly, around 2% as a whole versus the All-Share up by 6% and the FTSE100 up by 8%. Given the strong overall domestic market bias of the sector, those moves are not surprising. The biggest anomaly, masked by the overall data, however, is the strong out-performance of the services stocks with and international exposure, versus those with a domestic bias.
Polypipe was the biggest riser last week and our sense is that it is oversold at 238p. It has strong fundamentals in terms of UK market share, has moved into higher added value products and has growth prospects in the Middle East. The accounting is highly conservative and Nuaire accretive. Trading on 10x P/E for the current year looks cheap to us.
While Morgan Sindall was the largest faller it has been discussed and with a 4.4% fall SIG isn’t that far behind. We can appreciate why SIG receives limited support given some of the expositions of its strategy, performance and views in recent years but trading on a P/E of 9x current year earnings seems overly harsh. The current EV is around 25p for every 100p of revenue, which is very low by industry standards and the peer group and might, by now, have been expected to attract a predator. We have heard no industry reports of undue difficulties and balance sheet stress.
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