Market Commentary - Housing, Infrastructure, Construction and Services 11th January 2016
Taylor Wimpey, Interserve and PRS operator Sigma Capital have updated the market today. All three have December year ends. TW in a quite detailed update which is now the norm for housebuilders paints a positive picture of its future, as always providing some caution as it is organised for both the up and down parts of the cycle and we are still on a prolonged up part. Funds seeking FTSE100 recovery situations pushed Capita and Babcock to the best performances in our universe yesterday. Given the feeding frenzy in the market, especially at the larger end, it should probably not be a surprise.
Taylor Wimpey, Interserve and PRS operator Sigma Capital have updated the market today. All three have December year ends. TW in a quite detailed update which is now the norm for housebuilders paints a positive picture of its future, as always providing some caution as it is organised for both the up and down parts of the cycle and we are still on a prolonged up part. The data show the company to have increased volume of sales by 4% last year and ASP by 11%; The average price was boosted by a higher than norm number of Central London completions. The company expects to deliver earnings for 2016 at the upper end of consensus so that will be EBITA of around £750m. Interserve has issued an update today which is intended to reassure and it should. The company has indicated that trading remains in line with consensus and that net debt at year end will be £30m below the last guidance provided in mid November at around £275m. The stock remains under considerable pressure and there is no news of a new CEO as yet. Sigma has told that trading is in line with expectations and that its existing activities performed so well it choked back on new projects towards the year end. More Below.
Funds seeking FTSE100 recovery situations pushed Capita and Babcock to the best performances in our universe yesterday. Given the feeding frenzy in the market, especially at the larger end, it should probably not be a surprise. Capita rose by 3.6% to 519p and Babcock by 2.8% to 952p. Both stocks remain troubled after growing strongly in the post Lehman era, well at least until early last year. The prospect of needing an equity fund raise continues to hound Capita and will not go away until the strategy is clearer and fresh ideas come to the fore. Babcock will continue with more of the same as well but has a more robust balance sheet than Capita. But we are talking in relative terms hence the weak ratings which will take time to improve and a period of improving what exists now rather than acquiring. Travis Perkins was the backmarker, down 1.6% to 1451p. The move was just ebb and flow of trading in our view. Travis Perkins will probably be more in the spotlight on Friday when SIG and Grafton update.
Taylor Wimpey’s top team is balancing well the twins of triumph that comes from growing the business especially in good market conditions with the potential disaster that can happen in the sector when the down cycle hits it. The near death experience of 2007-2010 is never far away from the fore when TW makes a statement. The news today shows that the company is in a strong position and that the market remains positive. On the first issue, company situation, the order book in volume terms at 7,567 homes is slightly higher than it was last year though in value terms is a bit lower, £100m less at £1.7bn, due to there being more Central London homes in the mix in 2016. Cash remains high at £365m. The number of plots in the short term landbank is unchanged at 76,000 which is after adding 9,000 from the strategic landbank. The company indicates that it remains cautious on land buying and indystry comment is that it is seeking a 30%+ margin when buying oven ready land, a much higher level than 12 months ago and those of rivals. Given that it has created a large and viable strategic landbank it can afford to be selective. The company has reminded us that it intends to pay a total on £1.3bn in cash dividends to shareholders in the three years 2016-2018.
So if all is as expected at TW what about the market? There seems to be sustained demand for housing in the UK buoyed by population growth, high employment, low mortgage costs and high funding availability and government encouragement. In that mix there are things that can go wrong and “Boom and Bust” has not ended but there are signs that the cycle is being prolonged in most parts of the UK. There are exceptions, parts of the regions have seen very little of the good conditions experienced in recent years and the issues in the Central London market are recorded frequently in market comments.
The news today from TW will probably not affect the share price much today. The update from Persimmon last week triggered a strong rise in TW that anticipated today’s news. With EPS of near 18p for last year and we suspect the market will increase forecast today a little towards 19-20p for this year the share valuation is not stretched at last nights close of 174p.
Interserve management must wonder what it needs to say next to get the share price to a level that is nearer to peer group valuations. This is the company’s third trading update in four months and the message has been consistent. Poor UK construction performance will be offset by good overseas numbers and the waste to energy debacle is being managed. The copybook was blotted last year by the debacles over the ownership of the Kwikform operation and the waste to energy business losses. The CEO will depart in due course though as with the intended sale of the Equipment Services operation a reversal of the decision that he should depart cannot be ruled out! The news on the improved level of net debt at year end is helpful though it will be helpful to know better the constituent elements of that at the results.
Interserve says it is trading in line and the market is expecting EPS of 61-63p for last year and potentially a small improvement this year dependent of course on FX. Those numbers assume Energy to waste losses are taken as exceptionals The improved net debt position suggests that the company will be able to fund the dividend for the full year which will be at least the 24.3p paid last year. At 318p at close last night the news this morning should ease the downwards pressure on the share price. Peer group valuations are themselves somewhat impaired but 5x and a yield of 7.7% at IRV is pretty harsh.
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