Market Commentary - Housing, Infrastructure, Construction and Services 15th May 2017
It’s a day for updates from sector tiddlers with Bilby and Mortice updating us on progress. We attended the SIG meet the top team event Friday last. We got a very positive impression from the new CEO. The sector performed weakly last week against a positive performance in the overall market.
It’s a day for updates from sector tiddlers with Bilby and Mortice updating us on progress. Both have said that trading is pretty good, Bilby seems to be getting back on track after a distinct wobble and Mortice has said it is trading ahead of expectations. Bilby, a provider of maintenance services to Social Housing operators, came to the market just over two years ago with a buy and build strategy and as often happens it rose swiftly and then dipped severely. In even capitalised business development costs at one stage but soon restated as the treatments were potentially misleading. The company states today that it will make EBITDA of £3.6m for the year ended 31st March 2017, compared with the restated £2.5m last year. While EBITDA may have risen we expect, given the performance at the half year revenue in 2017 was in excess of £60m compared with £31.4m in 2016 so the margins are more in line with sector averages than the much higher levels it had when coming to the market. With a market capitalisation of just £24m it is too small for many investors. But in terms of read across to Mitie and Mears the news from Bilby is that demand in social housing for external providers of maintenance services remains positive.
Mortice provides security and FM services in the UK, India and some countries in the Far East. Like Bilby it has a buy and build strategy. It boast today that in the year to end March 2017 it will be materially ahead of current expectations but the data provided, in US$, does not break out FX impacts from underlying. But with EBITDA margins of 3.7% on revenue up 35% to $180m the performance is not stellar, in terms of profitability. We have met the company and the management is highly ambitious , evidenced in part by the acquisition of Elite cleaning services recently in the UK. It is one to note for the future, in our view and is seems to see no issues in creating demand for its services
There is also news from SNC-Lavalin which informs the market that Its bid for Atkins will not be increased from 2080p unless another party proposes or makes an offer, in which case it reserves its right to reconsider and, that the company has received the necessary clearances in the US for the deal to proceed.
We attended the SIG meet the top team event Friday last. We got a very positive impression from the new CEO. With 12 turnarounds already to his credit Meine Oldersma would seem to have the experience, and from the meeting, the credibility to turn around SIG. We see not market reasons why that will not happen. OK there have been false dawns before so why is this time different. Our conversation suggests that the new top team has grasped swiftly the key issues and taken actions where it can (eg closure of sub scale operations), understood where margins can be improved and recognised many of the flaws the previous team had with the materials manufacturers, which in many cases had become quite adversarial, which is not the best way forward in this sector but mat work in retailing. We are more positive now than before teh meeting in our view on SIG
News this week is expected tomorrow from Speedy Hire with its finals for 16/17 and Crest Nicholson is likely to update us; on Wednesday Countryside has its interims; on Thursday Balfour Beatty’s AGM should result in the company telling us a bit about recent trading and on Friday it’s the turn of PRS operator Grainger to provide its interims. If there are to be any surprises this week they could potentially arise from Crest, who may be seeing tougher trading in its South East markets and Balfour Beatty , who we suspect will be trading well. The stock suffered post Galliford’s recent recognition of issues on the Aberdeen by-pass, a JV with BBY and CLLN. BBY will have taken its view of this project, which is far from being completed and factored it into guidance this year to date s we are not expecting news on that.
On Friday last Morgan Sindall’s progress towards a 1200p share price continued with a sector leading 2.4% rise to 1188p. As we have stated earlier, the possibility of the company reaching a EPS of 160p in 2020 or earlier remains very real so there is some way to go yet in the valuation. Interserve was also a notable riser, up 1.9% to 246p as some investors se that the worst may now be in the past and that, despite substantial levels of debt, and equity fund raising is not absolutely necessary and that some issues can be traded for some time as the cash position recovers. Capita was the most notable faller on Friday, down 1.4% to 552p as views sway on its need to raise new equity and speculation on the identity of the new CEO increases. We expect it will not need new funds but that does not make the buy argument at this stage strong, merely emphasising that owning the share s carries above average risk/reward.
Moves last week
The sector performed weakly last week against a positive performance in the overall market. HICS stocks were broadly unchanged at the end of the five trading sessions last week whereas the market was up over 1.6%. So while the HICs sector is up around 10% YTD versus the market up 5%, the gap is closing.
Morgan Sindall was the best performer, up 7.7% in the period. We have mentioned the company earlier. Its rise is based on the company’s strong balance sheet and trading performance across all divisions being good and in some areas just getting nearer to industry average margins over the next few years.
Carillion was the largest faller over the period, down 5.3% or 11p, which matches roughly the 12.65p final dividend as the company went XD last week. The stock has a marmite element to it as some take a view it will trade through its balance sheet woes and others do not. The shorting of the stock remains at 21.3% in Castellaine Capital’s data, better than few weeks ago but still high. We are optimistic that the company will find a way through which will satisfy all stakeholders
Incidentally, Mitie (up 1.2% last week to 225p) remains highly shorted as well with 12.4% of its stock loaned to short funds. Given recent newsflow shirting at this stage seems to have limited justification. The company has made remarks about future margins , which will be around 4-5% which seem reasonable to us and is realistic about balance sheet recovery. The new top team has had plenty of time to read the situation and ‘fess up to past regime’s “failings” so we have to expect that the shorts are just ignoring recent statements and believe there are more skeletons, which we doubt.
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