Stephen Rawlinson
16 May 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 16th May 2017

Speedy Hire has reported its full year numbers for the period to March 2017 this morning. Crest Nicholson has updated the market and Civitas Social Housing has made another small acquisition. Speedy’s numbers show why its statements are now quite upbeat; it is signalling that the turnaround is down and it is now ready for sustainable growth. Morgan Sindall broke through 1200p rising 2.6% to 1232p. The last time the shares were at this level was November 2007 when the recession forced them downwards. The shares are up 66% YTD and yes it was one of our five picks for this year, the others were SIG up 23%, Costain up 34%, Forterra up 44% and MJ Gleeson up 15%. The FTSE All Share is up 5.3%.

Speedy Hire has reported its full year numbers for the period to March 2017 this morning. Crest Nicholson has updated the market and Civitas Social Housing has made another small acquisition.

Speedy’s numbers show why its statements are now quite upbeat; it is signalling that the turnaround is down and it is now ready for sustainable growth. It took a step back two years ago to get the basics right and having done what was needed is now well positioned, in our view. The statement contains some pretty punchy stuff! Revenue rose 12% last year to £369m, most of which was organic growth and EBITDA was up 19% to £63m. EPS rose 209% to 2.2p and the company has raised the dividend by 40% to 1.0p. Arguably net debt at £71m and gearing of just 1.1x is low for a hire company but that may just be a step along the way; ROCE is rising but at 8.4% has some way to go and leverage will help. Utilisation has risen and the hire fleet adjusted to hold products that are in high demand the business can start to reinvest in new products and acquire a little faster, at the right prices, as it did with Lloyds British just before the year end. What is clear is that the company is broadly content with its infrastructure right now, including the vastly improved IT systems and therefore the issues are around customer service and long term relationships. That is important not just for progress in the operations but also financially and in terms of management focus.

We shall attend the analysts’ meeting at 9.30 to get more background. With EBITDA at £63m and rising and with debt at £71m, Speedy looks to be cheap at 55p at close last night. Long term the hirers trade at 5-6x forward EV/EBITDA so with £71m of debt and market cap of £281m Speedy is bang in the middle of that range on an historic basis. We suggest however that the valuation is probably too low (given the superior quality of the earnings)  and that the EBITDA might reach £70m+ this year so there is plenty of scope for the share price to rise, even if net debt increases to say £100m. Target prices of 65p are likely based on the numbers today and the prospects.

Crest is probably more vulnerable than most to a slowing of the market around the M25 but that does not seem to have affected performance to end April, the first six months of its year. The business is said to be on track for 10% growth in revenue for the full year with the ASP 12% higher YTD though completions are down by 142 units to 1,604 for to the timing of the sale of PRS units last year. Forward sales are 5% up on last year in unit terms. We are told by the company that the market remains robust in its regions of operation and that it is able to get modest price rises which are covering build cost rises; the company mentions skilled labour shortages as an issue. The land market remains benign. The election does not get a mention. Our conclusion is that conditions have got a bit tougher for Crest but are manageable. The progress towards £1.4bn revenue and over 4,000 units a year is on track, we are told and land is being bought, in a benign market to secure that growth. In line with its house building sector peers, Crest seems to be confident it can make progress in the current market.

Civitas has acquired more properties, this time it has spent £6.1m on five properties with 51 tenancies in supported living. This is progress but the company is struggling to find stock as we have said before. The initial net yield on the latest acquisition is said to be in line with expectations, which we believe are around 6%. The operations are still some way short of spending the £350m raised and while its right that its sticking by its targeted returns it is still some way short of leveraging quality portfolio. As we have stated previously Institutions can disintermediate Civitas by investing directly in social housing and get 4-5% returns overall on leveraged capital, and therefore a much higher return on equity.

Moves yesterday were in a tight range and continued the trend of last week with the sector underperforming the market a little. Morgan Sindall broke through 1200p rising 2.6% to 1232p. The last time the shares were at this level was November 2007 when the recession forced them downwards. The shares are up 66% YTD and yes it was one of our five picks for this year, the others were SIG up 23%, Costain up 34%, Forterra up 44% and MJ Gleeson up 15%. The FTSE All Share is up 5.3%. While some investors might be tempted to take profits at this stage we believe there is still some way to go with all five stocks, depending on the macro picture.

The main loser yesterday was Interserve, down 3.4% by close of play to 237p. On trading grounds we could argue the stock is cheap but the uncertainty at the top level and the net debt picture make us wary. Even at this level, with near 60p of adjusted earnings likely this year it’s still one to avoid as the new CEO has yet to understand the numbers fully and take a view. Carillion was the back marker for much of the day and closed down 1.7% at 200.3p.

We attended a Serco Analysts’ dinner last night where no new data was provided. We will get an update with everyone else at end June. What is clear is that progress is on track, the pace being dependent on contract wins and for the next say 12 months, the outcome of Obamacare reform which accounts for around £200m revenue each year at present. The company seems to want us to be content with progress to date but far from complacent. There is still some sorting of historic projects to complete but the business is back on the list of favoured companies with all customers, including HM Government and bidding hard, especially into the UK MoD. The 120p share price is justified by the mid-term prospects, in our view.

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