14 March 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 14th March 2017

SIG is the main news today providing its numbers for 2016 and a new CEO. The main moves yesterday were the two ‘ Serves, Interserve and Homeserve. At the top end of our “league table” Capita got more support closing up 4.4% at 569p; investors perhaps now see the risk/reward and are accepting it.

SIG is the main news today providing its numbers for 2016 and a new CEO, Meinie Oldersma joins the group from April onwards having left Brammer following its sale into private equity in early February. There is not much time between roles but his experience of distribution should be put to early good effect. The story at SIG is very similar to Brammers’, difficulties in the short term, long term in a good position; how many times have we written that? The numbers for 2016 from SIG are in line with the lowered expectations. Organic revenue was broadly flat across the group, up 4.4% in constant currency (including acquisitions) and up 11% at the headline level as FX flattered 2016 sales versus 2015. Underlying PBT was down 12.5% at AER, £77.5m as guided in the most recent update. Reducing the dividend (rebasing it’s called) will not be popular with all investors but at 3.66p for the full year, versus 4.6p last year the reduction is realistic and proportionate, given the net debt position and underlying EPS last year of 9.7p, versus 11.3p in 2015. The actions over the next 12-18 months are about getting right what exists within the business to improve returns and lower net debt which was £260m at the year end (2.1x EBITDA). Sales in 2017 YTD are said to be in line with expectations which does not sound as positive as the updates from some rivals and will therefore be a topic at the results meeting at 9am today. More Below

The main moves yesterday were the two ‘Serves, Interserve and Homeserve’. The former fell 4.9% and the latter 6.7%. In our view even with the falls, to 223p and 523p respectively they remain stocks to avoid. The root cause in both cases really amounts to management. We look for three things, Men, Money and Markets when taking a view. In other words, does the management have the resources to achieve its goals in the markets in which it operates? The ‘Serves fail in both cases ion at least two counts. Interserve has unproven new management, a tough balance sheet and known difficulties in its markets. Homeserve has issues in all three areas of our “Men, Money & Markets” hypothesis of the essentials for companies to succeed.

At the top end of our “league table” Capita got more support closing up 4.4% at 569p; investors perhaps now see the risk/reward and are accepting it. Equally, it may be said, that on a day when M&A was the key talking point, Capita might be an interesting acquisition for many companies.

Bovis/Redrow/Galliford Try seems likely to rumble on. The GDV of the landbank is the best guide to the value of the company, in our view and that was £5bn at end 2016, using the company’s data. The existence of a large strategic land bank at Bovis, something that the company was early to enter compared with rivals, makes calculation quite tricky. NAV is no longer a relevant measure given the way in which land is transacted today. The debate for investors is whether Bovis is better alone in 2/3 years from now or with a larger entity and if so which. Inevitably the board has looked at the short term valuation posed by both suitors. But that should not be the only or the main criterion. If the offers were all cash the valuation now would be 100% the issue. But they are not so the board has a much more complex issue to face and there is no evidence it has done that. In the meantime of course others will be running the slide rule over Bovis but at a time when the land market is benign the risks might seem higher buying Bovis than building a landbank.

SIG tells us today that the strategy is OK and it was just a matter of execution; you know what that sounds about right to us. With a new CEO and a new FD SIG should be able to take advantage of its strong position in its core markets. The company indicates today that the search for better performance with its strategic initiatives caused the top team to be distracted from satisfying customers in the short term (if that sounds familiar then look at what is happening now at Berendsen). In SIG’s case revenue has been sustained at a high level (£2.8bn) despite the issues referred to and with large revenue and willing suppliers and customers a business can make progress.  The company points to some uncertainty in UK markets but a brighter picture in Euroland. The £4m loss on £26m revenue in Offsite Construction is disappointing but break-even is said to be likely this year as production issues are resolved and given the strong order book. We remain confident that SIG is a sleeping giant in its area of Merchanting and the basis exists for a very strong recovery in the company and therefore the share price from the close last night at 106.7p.

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