Market Commentary - Housing, Infrastructure, Construction and Services 18th January 2017
The unexpected update from Mitie, along with the replacement of FD Suzanne Baxter are the main issues of the day. The moves yesterday saw Babcock rise 1.4% to 955p which is not substantial but the stock has steadied in a 920-870p range which is a positive. Mitie has a few things to tell us today about trading, none of which are good and that the FD is to be replaced. The company tell us that operating profit for last year will be £60-70m versus earlier expectations that the out-turn would be nearer to last year’s £129m at around £90m.
The unexpected update from Mitie, along with the replacement of FD Suzanne Baxter are the main issues of the day. There is a conference call at 8am. More below. They somewhat overshadow other news which includes Loxam making an offer of 270p per share for Lavendon which has acceptances of 19.2%; TVH has asked Lavendon shareholders to take no action while it considers its options. The premium may now be 90% to the undisturbed price but as that did not include the news from the company that it traded ahead of expectations last year finding a suitable landmark to assess value is difficult. The current offer is around 7x EV/prospective EBITDA which is still not stretching but may be enough to win the prize for Loxam. This is the first time there has been a significant level of acceptances. But remember TVH owned 20.4% of Lavendon shares the last time it updated (3rd January) and we have not seen a new notification since then.
We also have an update from Henry Boot, the developer and contractor, who say the business is traded slightly ahead of expectations in 2016 and the final results for the year to end September 2016 from market newbie Watkins Jones who report a positive outcome for last year. Watkins Jones saw revenue rise by 9% and operating profit by 17%. Its prospects in its main markets of building student accommodation and PRS residential properties are said to be positive and the pipeline is substantial. More later on those two.
The moves yesterday saw Babcock rise 1.4% to 955p which is not substantial but the stock has steadied in a 920-870p range which is a positive. The losers comprised mainly stocks with a high level of US$ earnings which should be no surprise given the switch in sentiment in £/$ FX yesterday afternoon. Wolsleley was the main faller down 3.2% to 4865p followed by Compass down 2.7% and Rentokil down 2.5%. These moves are just technical shifts based on the FX rate so in that sense it hard for a fundamentals analyst to comment.
Mitie has a few things to tell us today about trading, none of which are good and that the FD is to be replaced. Lets’s get the FD issue out of the way first, Suzanne’s departure was inevitable as the rules of engagement in the quoted arena as such that continuing after the profit warnings and accounting issues was virtually impossible. The text states that she flagged a while ago that she wanted to move on which we find a strange thing to admit as its tantamount to resigning and therefore arguable that shareholders should have been told. It’s a very fine line in our view and one for active shareholders to ponder. The replacement starts immediately and is Sandip Mahajan who was until recently in a senior finance role at Balfour Beatty.
The trading situation at Mitie has possibly deteriorated further in recent months or the full extent of the issues has now been understood by the new top team. We are told today that after a two day board earlier this week the board has now recognised that the cleaning operations are substantially underperforming and that delays and deferrals in other divisions (Property management and Technical FM) mean some work expected this year will now not start until 2Q 17. Whoops. This is a surprise to us as we had not expected that conditions were quite so poor. Industry comment and company actions suggested that the business was in better shape than the news today suggests.
The company tell us that operating profit for last year will be £60-70m versus earlier expectations that the out-turn would be nearer to last year’s £129m at around £90m. The company indicate that its banking covenants are unlikely to be breached. But clearly the final dividend is unlikely to be paid, in our view. Our mid term view of the business is unchanged but clearly the start point is a bit worse than we expected as some of the news affects trading more severely than we thought likely. We shall report back after the conference call.
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.