Market Commentary - Housing, Infrastructure, Construction and Services
Taylor Wimpey and Capita have provided half year numbers this morning and Rentokil has announced a hi-tech approach to pest control, in collaboration with PA Consulting and Google. Yesterday we saw the mood switch towards relative safety (Mears was the leader up 1.8% with Compass and Rentokil close behind up 0.8% and 0.5% respectively) and real fear of the worst of Brexit outcomes (Interserve was down 2.8% and Galliford Try and Polypipe were down 2.2%). This scenario will play out most of the summer as there no answers on which investors can rely. In the current uncertainty we might see a return to scenario planning, a vogue in the late 1970s, early 1980s which aided understanding of the range of outcomes.
Taylor Wimpey and Capita have provided half year numbers this morning and Rentokil has announced a hi-tech approach to pest control, in collaboration with PA Consulting and Google. The message from TW is that the first half performance was as expected and that the Referendum vote has had no meaningful impact; demand has remained solid, mortgages are available and government policy remains positive. Importantly the company tells us that it is still on track to pay the promised £300m special dividend in July 2017, 9p a share, the same as this year. Capita’s numbers show overall revenue growth of 8.8%, 5% organic and growth in underlying operating profit of 10%. Those numbers should satisfy the market and show the business to be on a positive track. Concerns about net debt/EBITDA will remain as 2.5x is higher than the norm. The company sees more opportunity than concern regarding Brexit. It highlights that there have been delays in project approvals especially in IT in Financial Services, which other sources confirm. The silver lining that Capita sees are the mid term opportunities as companies adjust systems and operations to the potential exit. More below.
Yesterday we saw the mood switch towards relative safety (Mears was the leader up 1.8% with Compass and Rentokil close behind up 0.8% and 0.5% respectively) and real fear of the worst of Brexit outcomes (Interserve was down 2.8% and Galliford Try and Polypipe were down 2.2%). This scenario will play out most of the summer as there no answers on which investors can rely. The leave vote leaves UK companies with no rudder and no anchor for the time being. So we are left with company comments that it will be fine in the long term and some even saying it creates opportunities but choppy short term. A better picture may emerge in September.
In the 1980s scenario planning was the vogue, pioneered by Shell. The uncertainities of oil rising to a price way above the marginal cost of production in 1974, due to OPEC monopoly power, created circumstances in which outcomes were highly unpredictable. Businesses were therefore left to plan for a variety of outcomes and invest accordingly. Often they did not invest hence we are playing catch up today and manufacturing has declined. There are parallels now even also to the extent of random bombings and acts of violence that heighten general tension and cause specific damage. More on this theme later; the creation of scenarios and interpretation of them is not a widely practised art these days.
TW is keen to play down any concerns at this stage but is fully aware that it is still far too early to draw any conclusions about the potential impact of Brexit on its business. In the first half the company completed 6,019 homes, a 3% rise and ASP of £238,000, a 5% increase. The other numbers demonstrate the business to be on track with an order book of 8,683 homes, 78,000 plots in the short term land bank of which 60% are sourced from relatively low cost strategic land and period end cash of £117m, up 33% on last year. TW is seeing good conditions in the regional markets, including a robust wider London market but central London is still slowing, especially at the top end. So no real surprises there but the view does justify a highly cautious approach to the many two bed apartments that were built in Battersea and other secondary areas in recent years that are now nearing completion. On balance all seems to be well so far at TW and the 40% decline in share prices in the housing sector were a real buying opportunity and that may still have some way to run. Investors should be looking at the wider UK and not just guided by what seems to be oversupply of high priced two bedders in Central London.
Capita’s revenue was £2.4bn in the first half of 2016 and operating profit £318m, a margin of 13.2% up from 12.9% last year. EPS were 34.5p putting the company on track for the full year outcome of 74p that the market is expecting. Cash conversion of 122% should help calm some concerns about net debt levels though they should remain high as the net figure rose to £1,901m at end June from £1,761m . The company has spent £84m on six acquisitions in the period and sold two, Capita Medical Reporting and Fish Administration; the latter was one of the more wild deals of the late stages of the Pindar era. The company is keen to tell us that it has won £879m of new work in the period in a variety of sectors and the win rate was 1 in 2. References to the performance of Avocis are absent which is a surprise and the restructuring that affects the troubled DIO contract is buried deep in the text. The conclusion today is likely to be that Capita is on track and clearly is taking a better approach to building a sustainable business with high entry barriers in its markets. But there are few reasons in these numbers and the statement to alter the mainstream view and at 988p at close last night and 74p of EPS we suspect that after an initial climb the stock may settle back to current levels.
Rentokil’s new venture looks to be interesting. It has its results tomorrow and we shall report then on the numbers and the potential for Hi-Tech pest control.
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