Market Commentary - Housing, Infrastructure, Construction and Services 18th May 2017
Balfour Beatty has its AGM today and the update wins the prize for the shortest statement so far this year. The surprise news today is that Elis SA has made a proposed offer to buy Berendsen comprising 440p in cash and 0.426 new shares in Elis SA for every Berendsen share.
Balfour Beatty has its AGM today and the update wins the prize for the shortest statement so far this year. We are told that progress is being on the second phase of Build to last and that trading is in line. The company is pencilled in for 13.1p of EPS this year and near 20p next year but they are not the reasons to buy the shares. It’s the long term value that can be unlocked from the PPP/PFI portfolio, that is worth around £1.2bn that drives the market capitalisation of near £2bn and at 281p at close last night the shares remain good value, in our view. The construction and services operations are in recovery mode and, we believe are worth more than the £0.8m or less implied in the current valuation.
The surprise news today is that Elis SA has made a proposed offer to buy Berendsen comprising 440p in cash and 0.426 new shares in Elis SA for every Berendsen share. That will provide each holder with 1173p a share, a 51% premium on close last night. So far the Berendsen board has resisted attempts from Elis to engage so Elis has gone public with its proposal which stated at 1100p a share on 28th April. Clearly the value of the offer is some way short of the 1355p the shares reached in July last year before two profit warnings. That was a long time ago. The real issue is whether the price will get back over 1173p under the leadership of the current top team in the, next two years. That is open to some doubt, moreover the combination of Elis and Berendsen creates a very strong global operation, exposed to among other things recovery in Euroland that may be attractive to some Berendsen holders.
It is still early days in the “Battle for Berendsen”. Management will no doubt resist strongly as the bid has come at a low point in the development of the company, though it must be said it was a low that was quite unexpected and the share price reaction has been stronger than the news would suggest is justified. Our sense is that shareholders will hang on for more money but will be inclined to listen to an offer at this level. It may be that other parties now take a view and one or more may emerge with a viable alternative proposal. So there is much to play for, in our view and the Elis proposal leaves room for private equity, again, in our view.
Tiddler North Midland Construction has its AGM today and reports a strong improvement in performance in the first quarter with revenue up by 5% to £62m and operating profit more than doubled to £0.6m; the margin at below 1% is not satisfactory, according to us and management but the direction is right. Two factors of interest, firstly North Midland, with around £250m of annual revenue provides us with a 22 paragraph AGM update while BBY with £8bn annual revenue provides just two short ones! Maybe the company takes the view that it must use the opportunity to have its say when it has one. Secondly North Midland is very positive about its markets and progress, due to its order book but so concerned about skills and labour shortages that it is being cautious about growth.
The wobbles on Wall Street (down 1.8% yesterday) might be a macro factor that triggers a similar issue in UK markets, though for different reasons. Uncertainty in one place, albeit the cause is not transferable, can trigger uncertainty elsewhere.
SIG was the pick of the bunch yesterday, rising 3.9% to 131.9p, 28% up YTD. When the new CEO is a veteran of a number of turnaround and sell situations the shares will attract attention for reasons other than just trading fundamentals. Sticking with just the fundamentals SIG has bags of scope to improve margins just on existing business by working in harmony with the materials manufacturers; the previous regimes lack of attention to detail throughout the supply chain has changed already. In our way of thinking about SIG there are few reasons why 5% margins on the current £2.8bn revenue are not achievable which equates to operating profit of £140m, double last year’s adjusted level, and points to EPS of around 15p, given certain assumptions around interest and tax. At 132p SIG remains cheap. Attitudes at present are focussed on the frequency of false dawns at SIG; having met the management there is no reason to look backwards.
The losers yesterday were stocks that have had good recent runs and we are now seeing some profit taking/retracement. Interserve was down the most at 232p, a 2.2% fall and Grafton also dropped 2.2% to 741p. Kier was also among the losers and is the exception as the trend has been one way in recent weeks; it fell 1.9% to 1238p and now yields 5.3%. There is no compelling reason yet to buy the stock even at this level but on a 2/3 year view it is good value, given the unchanged commitment to 10% pa CAGR in earnings to 2020 and market conditions.
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