Stephen Rawlinson
15 March 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 15th March 2017

It’s a day for the heavy side materials producers to report. Forterra and Marshalls have delivered their 2016 results this morning. Forterra had a revenue increase of 1.5% last year to £295m and underlying EBITDA rose 4.6% to £71m. Marshalls shows revenue up 3% in 2016 at £397m and EBITDA up 17% at £61m. As a consequence of those improvements and lower interest charges and tax rates EPS rose by 32% to 18.95p (consensus was at 17.8p).

It’s a day for the heavy side materials producers to report. Forterra and Marshalls have delivered their 2016 results this morning. Both are justifiably pleased with the 2016 outcome and cautiously optimistic about 2017. Forterra had a revenue increase of 1.5% last year to £295m and Underlying EBITDA rose 4.6% to £71m; sales volumes rose during the year but the impact was offset a little by a change in the mix of sales with some lower priced product showing a greater increase in volume that the average, creating an adverse mix. Importantly the year has started well with higher sales and price increases are now agreed that “cover the increases in costs”. EPS last year ended at 21.5p which is in line with expectations, perhaps a little towards the top end of the range but not above it. As things stand the first half of 2016 looks like it will be very good, based on trading YTD and orders but, obviously visibility for 2H is low at present and the company quite rightly counsels some caution as the macro background is unclear. Net debt was £92m at the year-end, 1.3x EBITDA, so, as indicated in the pre close update the company has a solid balance sheet and the ability to expand. More below

Marshalls shows revenue up 3% in 2016 at £397m and EBITDA up 17% at £61m. As a consequence of those improvements and lower interest charges and tax rates EPS rose by 32% to 18.95p (consensus was at 17.8p). The final ordinary dividend was raised by 22% and the supplementary one by 50% to 3p; so overall the annual dividend was 11.7p, a 22% rise on last year and was a 3.7% yield at last night’s close of 315p. Net cash was £5.4m at the year-end compared with £11.5m net debt in 2015. The company indicates that the new trading year has started well with strong sales and order intake; the indication provided has a more positive tone than other recent updates from its peers but no numbers are provided in the releases. The large increase in EBITDA is partly the product of a substantial operational efficiency programme along with strong branding and support to the installer network. Sales into the domestic sector in the UK, which is roughly 30% of total sales rose 10% and strengthened in 2H to a 14% increase. Clearly, given the data above, sales into the Public and Commercial sector (the other main division) were flat. The volume /price mix in the sales rise is not stated but the implications from the text are that in the Domestic area there was an improvement in both aspects but in public sector and commercial volumes rose possible at the expense of price as the company gained some share. The company points to a positive mid-term outlook and adds little to guidance for the current year. More below

Both Forterra and Marshalls place an emphasis on growing organically and if they are to acquire it will be via bolt-ons. Both companies seem to recognise the industry they are in is cyclical and it’s no time for big bold moves. There is expected to be growth in their markets but the focus is on self-help and performance improvement in what are well run, well invested operations.

SIG was the best performer yesterday, up 7.3% to 115p as the update and new CEO appointment went down well with the markets. The main thread of the presentation was that some quite basic operational disciplines, especially in sales and marketing, had been only loosely observed in recent years. The new team has promised higher sales and improved margins in relatively flat markets by being much better in its operations. Achieving that will require a better accommodation with suppliers; an element of the business we believe, as outsiders, was not handled as well as it might have been in recent years from what we observed. Working with the suppliers is key to what SIG needs to achieve and previous management seemed to be less mindful of that than the new FD (the new CEO was not at the meeting). At 115p, SIG might look a tad more expensive than it was but to many will still seem to be cheap given the potential for margin improvement. EPS of 10.5p, the consensus for this year more than adequately justifies the share price, in our view.

Carillion was the back market yesterday, down 4.0% to 223p as the post results roadshow came to an end. The uptick in the price in recent days may have been a bit of short covering as the plan to cure the balance sheet gains some traction and credibility but has a long way to go. We remain positive.

Forterra’s maiden set of full year results are fully in line with expectations. During the course of this year the benefits of 2015 and 2016 investments shall be more evident and the Claughton plant is expected to come back on stream. The business was in good shape when it came back to the market and in 2016 the only real issue was some overstocking in the supply chain which has now cleared. High levels of demand for housing and the FX changes that had choked off imports should aid performance. Any caution arises from macro factors from what we see. Forecast for 2017 are likely to go up slightly today and the risk on the current year is reduced. The market is expecting around 22.7p of EPS this year. Lone Star’s c 50% holding remains in pace and may act as a drag on valuation but the prospects for the business are very good indeed so as that holding is placed we expect the price to improve with targets of 250p being the average level.

Marshalls is expected to deliver 19.6p of EPS this year and we suspect that forecasts will trend slightly higher on today’s results. The price closed last night at 316p so the stock is trading on 16x current year prospective earnings. The market may take some encouragement from the results but target prices of 330-350p seem a likely level as the valuation is ahead of the peer group at present.

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