Stephen Rawlinson
12 April 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 12th April 2017

Carillion has announced yet another contract success today, Countryside has made a trading statement for the first six months of its financial year to end March and Atkins, as expected, has issued a trading statement for its full year end on 31st March. Bilby has also provided us with an update for the year to end March 2017. Carillion’s good news is success at being appointed preferred bidder on a £75m project to build student accommodation in Manchester, for the University of Manchester, which is unusual as such facilities are often provided by third parties today. Countryside’s release indicates that it is trading well, as expected. Bilby has had a troubled couple of years since floating with its buy and build strategy in social housing maintenance and gas services. Atkins has added little to what the market knew already, which is right given the attention it has received recently.

Carillion has announced yet another contract success today, Countryside has made a trading statement for the first six months of its financial year to end March and Atkins, as expected, has issued a trading statement for its full year end on 31st March. Bilby has also provided us with an update for the year to end March 2017.

Carillion’s good news is success at being appointed preferred bidder on a £75m project to build student accommodation in Manchester, for the University of Manchester, which is unusual as such facilities are often provided by third parties today. The other unusual element is that Carillion will be doing some of the design work, or at least be responsible for it which is not always the case and provides evidence that there is probably increased demand for the contractors to provide more integration. This project is not large and Carillion usually announces work worth over £100m but the share price needs some good news and this project has some interesting aspects. It may not move the share price today but this is a good win for the company, in our view.

Countryside’s release indicates that it is trading well, as expected. It is doing what it said it would do in the IPO just over a year ago. It calls itself a home builder and urban regeneration partner and the latter is a much larger feature of its work than with housebuilding rivals, that should be positive for the valuation as the risk characteristics are very much lower in that area than they are in speculative building. Completions in the first six months of 16/17 rose by 31% to 1,437 homes and the sales rate was a high one in the sector at 0.89 (dwellings per site per week). Partnership completions were up 23% to 987 dwellings (69% of group total) of which 36% were private completions, 33% PRS and 30% affordable. This mixed tenure approach to such schemes will persist and not just at Countryside. The housebuilding segment showed sales up 54% at 450 units; ASP fell 31% to £540,000 reflecting the plan to reduce exposure at high price levels in its South East base. The company has added to its considerable landbank and now has 16,124 plots in the partnership division and 20,472 in the housebuilding area representing nine and twenty years respectively of current levels of output! The company does not say it but it looks to be on track for 25p of EPS which is the consensus for this year and if current market conditions prevail the risk is on the upside. At 261p at close last night the rating is in line with its peers.

Bilby has had a troubled couple of years since floating with its buy and build strategy in social housing maintenance and gas services. In addition to the trading update it has announced yet another change in broker and adviser, its fourth broker since coming to market. The company highlights recent contract wins and that it believes it is making progress but excludes references to key issues such as net debt, performance against expectations, revenue growth and margins. The focus is on gas servicing work in London and the South east for Housing Associations, which was the mainstream business before the float which caused it to think that it could grow in building maintenance as well as gas. Some of the acquisitions, such as Purdy were good business that have been hawked around for a decade other were not quite first class. We have looked closely at Bilby in the past and it seemed to be a good business when it came to market but margins at 13% were always going to be unsustainable. Some accounting treatments (now corrected) were questionable. At 39p, compared with a float price of 58p the shares may be ready for a revival as the company gets back to basics but it needs to get through a full year of trading to show it can deliver. It’s not an issue with its markets it’s about the company growing far too fast and being naive.

Atkins has added little to what the market knew already, which is right given the attention it has received recently. Expectations remain unchanged and the group traded well in Q4. The geographic pattern of strong US and UK and mixed conditions in other geographies is unchanged. The Energy segment reference is a tad more positive than usual indicating stabilisation in oil and gas markets. The company points to the beneficial impact of currency several times more in a cautionary way than anything else as it knows that FX can swing around. The company also highlights the recent settlement with the pension trustees in which it reconfirmed the existing plan, established in 2013, to pay around £34m cash this year into the scheme rising at 2.5% a year to 2025. This sum equates to near 20% of 2015/16 EBITDA. New instruments are fast emerging that will allow companies to use bonds rather cash to satisfy the Trustees legitimate requirement to have some cover in place for long term potential underfunding; it looks as though Atkins has continued with the existing method of lobbing in cash for now. The market now expects 120p of EPS this year but at 1978p the shares are boosted by the 2080p potential bid.

Balfour Beatty broke with the trend yesterday and rose 6% to 286.7p following favourable broker comment. The pack is starting to realise that BBY is past the worst of its problems, is probably “cured” but it’s still a bit early to put the full picture in the shop window. We are talking construction so stuff can bite long after the threat seems to have gone. Mostly it’s little stuff of no consequence but sometimes it’s not. So caution is the watchword and BBY is ensuring there is more than enough good stuff in the mix to be able to handle a problem on a few jobs. But with a PPP/PFI portfolio worth £1.2bn and a market capitalisation of £2.0bn the valuation is still way too low, in our view.

As for other stocks the outcome was very bland. Capita rose 2% to 554p and was the second best riser while Grafton fell 1.3% to 712p, the largest faller. Capita is starting to get some stickiness at around 550p despite much further change to come. We suspect Capita can work its way through its issues but the identity of the new leadership team is needed before investors can take a reasoned view.

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