Market Commentary - Housing, Infrastructure, Construction and Services 10th January 2017
The mainstream HICS stocks are quiet today. Topps Tiles has updated on its performance in the 13 weeks to end December and the read across to the Merchants is at best neutral. Yesterday’s share price moves epitomise the current state of affairs in the sector, in our view. Cutting to the chase, the segment has no real direction. The industry and company newsflow suggests that Brexit and the economic cycle is not affecting the sector much in terms of demand. But FX, long term bond yields, the normal pattern of economic cycles and some activity data points to there being a few “issues” ahead.
The mainstream HICS stocks are quiet today. Topps Tiles has updated on its performance in the 13 weeks to end December and the read across to the Merchants is at best neutral. Its L4L sales rose 0.3% in the period but as there was an extra trading day versus 2015 the outcome was a small decline. OK, Topps is more retail and is just a small part of the Building Materials product range but it’s real data. We are told that the company believes it outperformed the market and that trading conditions were soft in calendar Q4. The performance at Topps is as expected. So on Friday when Grafton and SIG update we should not expect too much in the way of increased RMI spending, it would appear from the observation from Topps. Conditions in other UK market segments served by the Merchants are likely to have been better than in RMI with growth of 2-3%.
Yesterday’s share price moves epitomise the current state of affairs in the sector, in our view. Cutting to the chase, the segment has no real direction. The industry and company newsflow suggests that Brexit and the economic cycle is not affecting the sector much in terms of demand. But FX, long term bond yields, the normal pattern of economic cycles and some activity data points to there being a few “issues” ahead. The HICS sector has a lot of December year ends and by the time teh Finals are reported in February and March better guidance for the current year will be available so there is no rush to act at present. We expect to hear little encouragement to have forecasts for 2017 that show earnings much above 2016 levels. That seems to be the assumption behind current valuations for many sector stocks. We picked out five possible exceptions last week (Morgan Sindall, Costain, Gleeson, SIG and Forterra).
The main movers yesterday shifted on little volume and the general drift was southwards in the HICS segment. Many sectors of the UK stock market are quite responsive to FX, more so than the HICS stocks and sterling took a tumble yesterday. Hence the market gained 0.4% but the HICS sector was broadly level to down, with housebuilders gaining little (based on trading news and interest rate prospects from Hard Brexit) with other sub-segments down. The best performer was Morgan Sindall up 3.4% to 825p on just 28,082 shares traded (2x normal volume but still a low level compared to market capitalisation). The weakest performance was from Mears, down 5.3% on only 22,352 shares traded. Mears price has been in trading range of 430p to 480p since the results in mid August; that range is wide, reflecting the impact of low volumes but it is consistent. For the avoidance of doubt, both stocks are still cheap in our view. It must also be mentioned that Capita had another poor performance, down 2.9% to 500p; there is no solid information about which investors can get enthusiastic. So fear is driving the price and its a long time before the planned CMD describing the new strategy. In the meantime exit from the FTSE100 in March, at the next reshuffle, seems likely on the current trajectory. That creates its own momentum and share price moves.
We suspect this “Phoney Brexit War” situation will continue for some time. How soon cracks will appear is the dominion of others to pontificate. Much depends on the nature of the UK’s exit from the EU and in the short term the rhetoric around it. Queen Theresa may be just bluffing about Hard Brexit and attempting to get a better deal than Cameron achieved. After all, Boris suggested early on that suing for divorce is a good negotiation strategy for getting a better deal from a relationship. Or the alternative may apply and the thrust is to go it alone in the world with Trump’s support. Cock Up or Conspiracy? Take your pick. Whatever the outcome the UK equity markets will not rise every time sterling weakens and weak currencies are a hallmark of weak economies.
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