Market Commentary - Housing, Infrastructure, Construction and Services 13th January 2017
Forterra, SIG and Grafton have issued updates this morning for the year just ended and all three contain no surprises. Lavendon has also issued an update which helps to explain why TVH and Loxam have been so interested but probably not why the Directors initially recommended the 230p bid.
Forterra, SIG and Grafton have issued updates this morning for the year just ended and all three contain no surprises. Forterra and SIG are two of our five stocks to watch this year. Forterra tell us that the last two months of the year activity remained high and so sales volumes were ahead of prior year and earnings are in line. SIG has no news on getting a fresh permanent CEO but with L4L sales up 0.3% for the year (11.2% including FX, working days and acquisitions) the market will be relieved. PBT will be as previously guided, between £75m and £80m, phew! Grafton’s revenue numbers are a tad ahead of expectations in Q4 from what we can see. They were up 5.3% L4L/CER at group level and 4.1% for the year as a whole. The update does not tell us that earnings will be in line with current expectations but given the sales data and the absence of any comments on costs we should assume that there are no issues, good or bad, with earnings. More below
Lavendon has also issued an update which helps to explain why TVH and Loxam have been so interested but probably not why the Directors initially recommended the 230p bid. The results for 2016 will be ahead of expectations as revenue rose by 8% at CER and margins improved despite some of the revenue gain arising from market share improvements. The improved revenue has come from additional fleet of course but net debt will be below 1.75x EBITDA according to the company at £141m at CER, £157m at AER. Looking at those numbers the company is signalling that EBITDA last year was at least £85m so given and EV at close last night (using year end net debt) at £600m the EV/EBITDA historic is 7x. The share price closed at 265p. Long term hirers usually trade at 5-6x EV/EBITDA prospective so the current buyers premium based on the last offer of 261p is not stretching by most standards, given that further growth is expected this year.
The range of moves yesterday was quite tight. Morgan Sindall ended up 2.0% on 75,783 shares traded, a relatively large volume in its case. It is 9% up YTD so the support has been strong, for good reasons. Travis Perkins took the “next to worst” position with a 2.1% fall to 1423p as the market adjusted to the Merchants seeing weak demand. But the largest fall was at SIG as it had negative broker comment, down 5.3% to 94.4p. The underperformance might also have been in anticipation of a weak update today but pessimists will be disappointed. The commitment to improve the existing operations and to reduce net debt has been said before but the platform to achieve that is stable, internally and externally which provides credibility.
Forterra came back to the market in April last year and has sustained the 180p float price at times of normal trading in the market; it had a post Referendum blip along with most building relayed stocks from which it has now recovered. There is no new information today but there are some strands of thinking that need emphasising. The company has delivered post float and net debt/EBITDA was below 1.5x at the year end. That provides scope to grow or return cash. The trajectory on cash and trading points to net debt being lower than 1x well before the year end after the planned investments in Desford and Claughton. No news on reopening Accrington as yet. The other point to emphasise is that the supply chain to the market is in better balance which should provide for less disruption in stocks and factory output thereby assisting cost reduction. One observation from us is that the level of imports is also likely to be held in check this year as FX rates make overseas produced brick more expensive that they were 2/3 years ago; that should allow all brick makers to regain parts of the market.
The expectation is that Forterra will deliver just over 21p of EPS last year and given statements by other market participants and the availability of additional capacity this year, it may be that forecasts for this year will tweak up a little today from the 21p level. The price at 180p looks far too low in those circumstances.
SIG had a disappointing year according to interim CEO Mel Ewell. In trying to achieve the strategic initiative targets it took its eye off the ball in terms of satisfying customers. From what we see and hear it had been unfocussed on its end markets for some time. Sales in the UK and Ireland grew last year by 1.1% which is a reasonably good out-turn in the circumstances and fell by 0.5% L4L in Euroland. Which again is not great but is far from the disaster it might have been, given trading conditions and as some commentators suggested. The growth initiatives in Structural Insulated Panels and in Air handling are not mentioned this morning but should boost substantially earnings in 2018. Clearly we await news of the new CEO but in the meantime the business appears to be ticking along at a better level than pessimists might have feared.
SIG will deliver EPS of around 9.5p for last year and the market is looking for the same this year. As with Forterra the company is providing no pointers to improve forecasts but trading conditions suggest that the anticipated numbers are quite cautious.
Grafton’s data is quite positive in our view. The UK trading picture was helped by a good performance from Selco, a very successful format and the traditional UK business was better than expected despite highly competitive markets. UK merchanting revenue was up 2.9% L4L and 4.6% in the last quarter. The merchanting operation in Ireland took advantage of the improving market and revenue showed double digit percentage growth for the third year running with 11.6% increase L4L. The Belgian market continues to be trouble with sales down 6.4% (L4L/CER) but that is expected and there is no real answer other than to trade through.
Grafton should deliver 42p of EPS for last year and around 44p for this year, assuming current FX. The shares closed at 541p last night which makes its valuation lower than in recent years but not much out of line with its peers. We suspect it will respond positively today and that targets of 650p will be realistic.
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