Market Commentary - Housing, Infrastructure, Construction and Services 12th January 2017
Barratt Developments and Savills have issued trading updates today. Barratt report that in the first half of the year to end December trading has been in line but there is an increased level of caution, reading between the lines. Savills 2016 performance benefitted from the timing of several transactions near to its year end and FX so the out-turn for the year was “meaningfully ahead” of previous expectations. Barratt’s update is likely to be greeted with a mixed response. There is a conference call at 8.30. One of the key talking points will be London demand which the company states is a headwind affecting margin growth and ASP
Barratt Developments and Savills have issued trading updates today. Barratt report that in the first half of the year to end December trading has been in line but there is an increased level of caution, reading between the lines. Given the healthy level of demand, performance YTD and forward sales levels the company says it expects to deliver its full year volume guidance which is for modest growth but says little about price expectations and costs, the latter probably impacted by higher labour and material costs. First half completions were 7,180 versus 7,626 so the pace will need to increase strongly in 2H; forward sales are 16% higher than last year and the ASP in 1H was up 3.9%.
Savills 2016 performance benefited from the timing of several transactions near to its year end and FX so the out-turn for the year was “meaningfully ahead” of previous expectations. More interestingly though the company has indicated that guidance for 2017 is unchanged as increased levels of uncertainty and rising bond yields are expected to reduce transaction volumes compared with recent times. The company does not indicate it intends to alter the cost base or take action given that assumption. More Below
Sodexo has a high level of read across to Compass and has today reported its fiscal Q1 revenue performance to end November 2016. Revenue showed underlying decline of 1.5% in the period which is a sluggish start to a year when it still expects to record 3% revenue growth and up to 9% improvement in adjusted operating profit at CER. The business was impacted positively last year by the Rugby World Cup but the effect was less that 1% of group sales. The Energy and Resources operation is still in decline (-4.5%) albeit at a slower pace than last year. The weak performances were offset to some extent by growth in Education and in Health care and seniors. The comparatives get less challenging as the year unfold partly aiding the confidence that the rate of growth pick up. The read across to CPG is not the most positive we have seen and we expect will impact a tad on enthusiasm for the shares today.
Interserve’s update yesterday triggered a strong rise in the share price, up 4.8% at COP to 333p. The improvement in the price faded towards the end of the session but the increase will be welcome to many. The valuation at 5.4x prospective p/e continues to reflect an undeserved lack of conviction from investors. Other than Interserve most moves yesterday were in a narrow range with Kier rising the most at 2.1% and Babcock the largest faller down 1.4%. The Trump Bump might just be running out of steam.
Barratt’s update is likely to be greeted with a mixed response. There is a conference call at 8.30. One of the key talking points will be London demand which the company states is a headwind affecting margin growth and ASP. It has taken action on pricing on some properties and bulk sold a 54 apartment deal in Fulham and Aldgate. It is reducing London exposure completion just 367 units in the period versus 842 last year. Those of us who frequently come into London via Waterloo will know there is still some work to do on its developments at Nine Elms.
Despite the smaller number of completions the company expects a 7% increase in PBT in the period just ended. That helped net cash to rise by £170m to £195m which provides additional credibility to the promise to return £1bn cash to shareholders in the three years to November 2017; the new plan will be revealed at the results on 22nd February. Net cash was aided by reduced spend on land which fell to £328m in the period from £560m in the prior year; 5,262 plots versus 10,967 last year. We suspect that the recent purchases comprise fewer apartment plots. Importantly for shareholders investment in strategic land continued and 6,562 plots were acquired versus 4,822 in the prior year.
We shall attend the conference call. The sense we get from Barratt is that while demand remains strong outside London there are clearly weaknesses inside the M25 no doubt partly fuelled by Brexit but also by the normal cyclical pattern. History tells us that the peak in London is normally the early stage of a ripple effect in the rest of the country that lasts 12-18 months which causes even some of the most sluggish of the regions to see some growth. Barratt and TW have equipped themselves for that and are shifting out of the M25 area. We expect the news from Barratt will have a neutral impact as TW and Persimmon have been saying similar things so this is not really that new. The level of completions in 1H is a bit lower than expected which may also temper enthusiasm for the stock as it leaves a lot to do in 2H.
Finally we note that Redrow has shown some backing for inside the M25 with a deal to buy Building land at Kempton Park which will see 3,000 new units eventually replace the race track there. But the transaction is long term as little new building is expected before 2020, ready for the next cyclical upturn.
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