Market Commentary - Housing, Infrastructure, Construction and Services
Carillion, Tyman and Victoria all have news today that might affect investors views on future price activity in the sector. The themes that Brexit has had not discernible impact yet on short term performance, that uncertainty levels are however greater but in the long term it will all be OK continue. The notion that everything will work out just as we wish, a recurring human trait endures but what each of us wishes is different! So caution is needed, as ever along with careful understanding of each stock.
Carillion has announced progress on two JV projects worth £276m in revenue in total, £147m to Carillion based on its share of total JV revenues. The company’s role in the projects may lead to a different outcome at group level, in terms of revenue Tyman’s half year results show stronger progress than might have been expected with L4L revenue up 4% at CER and operating profit up by 9% on the same basis. Victoria plc, the floor coverings company pursuing an aggressive buy and build programme, reported revenue up 101% to £255m and underlying operating profit up 133% to £22m in its full year to end April 2016. Tyman and Victoria claim to be substantially unaffected to date by Brexit and in both cases have good reasons to believe it will have a limited impact, whatever the outcome might be. More below.
The moves yesterday were mainly around a return of support for the cyclical sectors so badly hit from the first trading sessions after 24th June. Galliford Try led the way rising 3.6% to 977p closely followed by Morgan Sindall and Balfour Beatty. These stocks remain some 20% or more below their peak levels for the year and in most cases prices reflect a bad macro outcome from the Brexit process. Depending on views n that outcome they could be very inexpensive. Serco was the back marker as it retraced some recent strong performances and we attribute the 0.8% fall yesterday to close at 117p as simple ebb and flow of trade on the day.
Carillion’s Canadian operations have a 60% JV with Emera Utility Services and it has won an £86m project to build a power link between Newfoundland and Nova Scotia and connect the former to the US grid. It should enhance the result for this year, or at least partly underpin current forecasts as it is due to complete by April 2017. The company has also reached close on a PPP project to build schools in Ireland in conjunction with a Dutch Infra fund. Both projects are in line fully with Carillion’s strategy for the type of work it wishes to undertake. The level of shorting in Carillion’s stock has fallen but still remains high at 18.4% (Source; Castellain Capital). We suspect that the shorts will close a lot further over the next 12 months as the coampny shows that it is unaffected by Brexit (the trigger for recent dips) and that its balance sheet problems are not inhibiting severely current trading. The pension deficit may be affected adversely by recent shifts in yields and the c £60m annual additional cash contribution comes from money that might have been used to fund growth.
Tyman’s recent deal have aided the company to perform well from what we can see. The headline growth of 15% in revenue and 22% in operating profit will be of much interest to investors as the underlying numbers. The company is quite realistic about prospects in the UK in second half after a flat first half. It sees a slowdown in 2H in the UK which it expects to offset to some extent through self help and new product development. The US is expected to see good growth and the extension of the revenue into more commercial markets should aid performance. The international operations saw a fall in revenue of 4% L4L and at CER due in part to production changes in the UK and weak conditions in Brazil; otherwise market conditions showed modest growth. Tyman remains a tightly run company as evidenced by the 240% improvement in cashflow and the net debt rising by just 40% to £144m despite substantial spend on acquisitions in the last 12 months. History tells us to be wary of build and build strategies in cyclical markets but Tyman has succeeded so far due to its substantial operational capability and tight financial control. Net debt at 1.8x EBITDA is manageable but may constrain share price development.
Victoria Carpets is included as its sale are related to the housing sector and because it’s an interesting story. The results statement is forthright in its approach and worth a read for that reason; references to commentators hyper ventilating in over reaction to the EU referendum outcome is just one of the quotes. More data on L4L performances might have been helpful as the business is fast changing, though the statement does highlight some elements of improved performance in acquired operations. The improvements are impressive but data on the relative contribution of pricing, volume, overhead reduction and efficiency gains would have helped. We look at Victoria for read across and the view is positive. The company indicates that performance has been strong since 24th June in the UK. With EPS last year of 84p (adjusted) and a share price of 1200p the stock is up with events for many. There is a Marmite element about Victoria’s leadership, which forthright comments about politics and quotes from General Patton encourage. The commitment to delivering value to shareholders is strong and a constant theme worthy of support but then 33.5% of the shares are held by the Chairman, which could be positive or negative, that’s Marmite for you!
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