Market Commentary - Housing, Infrastructure, Construction and Services 20th January 2017
Short version today as there is little new to add. The departure of Neil Cooper as FD at Barratt after roughly a year in the role, announced at 4pm yesterday is an odd one. The explanation that the chemistry was just not working after around a year in the role is understandable and a swift break is best in that situation. Berkeley continue to buy back their own company shares, a process started around a week ago. Tony Pidgley and his board would only do that if they regarded the shares as good value.
Short version today as there is little new to add. The departure of Neil Cooper as FD at Barratt after roughly a year in the role, announced at 4pm yesterday is an odd one. The explanation that the chemistry was just not working after around a year in the role is understandable and a swift break is best in that situation. But it is a slightly unnerving failure of a careful selection process. Stuff happens and there are no suggestions that it is due to business performance so no reason to alter positive views on Barratt.
Berkeley continue to buy back their own company shares, a process started around a week ago. Tony Pidgley and his board would only do that if they regarded the shares as good value. In itself that is hardly a reason for an investor to follow their example as the universe of alternative actions is much smaller at the housebuilder than for an investor. And while we regard buy-backs as a relatively inefficient use of shareholder’s cash we can take some some “learning” from Berkeley’s action as it would never buy back at high valuation and certainly not at a peak one, as may have been happening at Compass.
Mitie was the main riser yesterday and cannot seem to get out of the news. It was up 3.9% to 203p as investor support for the shares increased. It is nearly back at the level it was the day before the most recent warning which was 207p. We should expect further volatility of course and the odds on another write-off are very short. Further adjustments are likely to be needed for IFRS15/percentage of completion accounting, capitalised mobilisation costs and the company itself has not ruled out that disposing of the Care operations may involve paying a reverse premium. But on the basis that the debt funding conditions will not be breached, that any further financial damage is limited in its nature and that within lurks a £2bn annual revenue operation with average profitability in its sector the stock is supportable at the current level.
Indeed once the bad stuff is out of the way at Mitie the experience of Serco is possibly an instructive message for investors. There is no question there is much to do at Mitie, and that 100s of millions of pounds of shareholders funds were wasted on acquisitions but the core operations, created by David Telling and Ian Stewart, somehow survived and in some areas thrived. But for investors the history is now irrelevant.
The weaker performances in the 22 stocks that are the main focus of our attention were mainly among those with relatively high levels of US trading exposure. Balfour Beatty fell by 2.9% to 265p, Compass by 2.3% to 1416p and Atkins by 1.5% to 1431p. There were exceptions of course (eg G4S) but in attempting to see a common thread in the downwards moves the improved strength of £ versus the US$ in the last 48 hours, since the initial impact of Queen Theresa’s Brexit speech wore off, is a reasonable explanation. It is a fine technical approach to trade US exposed stocks on the FX moves but it happens. Sterling appears to have steadied overnight and a breach of the £1=£1.20 has not reoccurred.
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