Stephen Rawlinson
13 April 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 13th April 2017

HSS Hire has announced that CEO John Gill is to step down and the company is now seeking its third CEO since floating two year ago. Sodexo has released its first half numbers and they are not the best improvement on last year that we have seen.

HSS Hire has announced that CEO John Gill is to step down and the company is now seeking its third CEO since floating two years ago. The new man will lead the next phase of the recovery we are told as the heavy work load in reshaping the business is done and sales growth is now needed. John will remain in post until a successor is found which is usually not a good idea, in our view. It’s most likely that this will trigger a bit more upheaval in the business as any new CEO will want to do more than implement the other guy’s strategy. The evasive answers to some key questions at the results meeting (5th April) gave evidence of some lack of conviction about what the group might look like in 12 months’ time. The decision to have a change at the top is clearly quite sudden and unfortunate for all concerned. The shares closed at 64p last night and if we are right that there is likely to be more change ahead and uncertainty in the short term the price looks to be vulnerable. 

Sodexo has released its first half numbers and they are not the best improvement on last year that we have seen. Revenue was €10.6bn in six month period to end February, a 0.3% increase on last year at CER and no change at AER. Adjusted operating profit rose to €723m, up 7.7% at CER and 9.7% at AER; there was a €137m exceptional charge to profit in the period for the Adaptation and Simplification project which has accounted for €245m of spend and is now completed. The company still expects to grow revenue by 2.5% this year and operating profit by 8-9% and points to contract wins and easier comparatives as the main reasons for optimism. The company indicates that the performance was in line with expectations and of course the operating margin to 6.8% will be welcomed. The read across to Compass is clear. The message in terms of regional performances shows reasonable revenue growth in N America and good growth in the Rest of the World and weak performance in Europe; performance in Euroland was adversely affected by the Rugby World cup having been in the prior year numbers but even so revenue was still down. More below

SIG was the best performer yesterday, it rose 2.1% to 116.2p, its highest level this year and 13% up YTD. We picked out SIG as a stock that might potentially double on a 12-18 month timescale if the right appointments were made and we stick by that view. The tightening of insulation regulations in several countries, some recovery in Euroland build rates and a better accommodation between SIG and its suppliers are needed and seem to be happening. Germany continues to have a housebuilding shortfall and production is scheduled to rise this year, as it is in the UK. Our sense is that SIG’s new top team has a tough task ahead but it’s far from being “Mission Impossible” indeed its quite likely in our view. The key is working better with its main suppliers, from what we can see to ensure it is getting a fair return on the value it adds in distribution.

Homeserve was the back marker giving back some of its post trading update gain, it fell 2% to 633p. The decline was just the ebb and flow of trading based on a bit of short term profit taking, from what we can see.

The main message from Sodexo is quite positive despite the weak Euroland performance. Sales remain affected by weak conditions in the Energy sector and that aspect features in all three geographic regions. In all five operating divisions France is picked out as a weak performer dragging down the group out-turn; Compass has limited exposure in France. The company spent €165m on small acquisitions in the period as it continues to see growth opportunities so we should expect improved performance coming through in 17/18. The improvement programme is said to have delivered €60m of savings in the first half. The company points to a number of significant contract wins during the period which should have a positive impact in 2H so the notions that it will get 2.5% growth in revenue this year and 8-9% operating profit growth seem quite realistic.

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