Stephen Rawlinson
22 June 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 22nd June 2017

James Latham, a £200m revenue a year timber merchant, reported its finals to end March 2017 this morning. Capita topped the leader board again yesterday with a 3.8% rise to 696p as big brokers start to change view. Are there other examples of stocks that are substantially out of favour but have strong market positions you may ask?

James Latham, a £200m revenue a year timber merchant, reported its finals to end March 2017 this morning. Its story is always interesting as it has read across to the main merchants. In the UK there are two companies in this space that have survived as independents, James Latham and Meyer International, now privately owned, the rump of what became Jewsons. They have similar levels of revenue. While James Latham is quoted it has a strong family ownership and Meyer is also, effectively, family run. James Latham reports that revenue rose near 7% last year to £199m and operating profit was 8% higher at £14.2m. The company was able to pass on a substantial portion of the price rises it faced on its imported products and had a small rise in volumes which aided performance. But the GM fell by 0.3% as a consequence of competitive pressures. The company had net cash of £17.2m at the year-end but also a pension deficit of £166m which has varied greatly with gilt yields. Read across from Latham suggests demand remains positive and price rises can be passed on in certain product areas.

Capita topped the leader board again yesterday with a 3.8% rise to 696p as big brokers start to change view. While nothing has altered much in the business the broking “herd” is starting to decide it was not so bad after all. We say starting, as the possibility of a 1000p share price is realistic with the right CEO appointment and adjustments to the strategy and operations, based on demand for what the company does and its existing contracts and market position. But we are not at that point yet and will not be so for some time. So entry at 696p is not without some short term risk. This is yet another example of investors selling on bad news causing a price to slip badly but remain there long after the selling has stopped. Capita’s operations are too important for many of its customers, at least in the short/mid-term so they were always bound to be supportive.

Are there other examples of stocks that are substantially out of favour but have strong market positions you may ask? Babcock, Carillion, Galliford Try and Interserve stand out, though of the four only the first two have really strong market positions and in both cases the main customer where they are strong is the MoD. Interserve also has good contracts with MoD but they are not as large a percentage of revenue as at BAB and CLLN. Babcock at 902p may not have the growth to justify its previously high rating and it has several issues to work through but with 78p of EPS expected this year and 89p in the year to March 2019 it may be the next stock that big brokers realise is potentially oversold. The data show only 0.5% of the stock shorted so there would appear to be few betting against it rising again, which is a good sign. We continue to believe that Carillion can trade through its problems, which are more balance sheet issues than trading ones, but it will be a long haul and the shorts are now over 24% according to Castellain.

The bottom end of our league table shows the Merchants facing a tough time. Grafton fell 2.7% to 727p and Travis Perkins fell again to 1469p, a 2.4% fall. While Berkeley was positive yesterday it is a company that is run quite differently from others. The news from the housebuilders has remained stronger for longer than expected so demand remains positive in that area albeit that it is subdued in RMI. But short term the Merchants are having to cope with inflation of input costs which is difficult to pass on in full. In the past inflation helped Merchants as the stuff in the yard became more valuable but with supply chains now much shorter and with the hedges that were in place expired rising prices are starting to hurt a little. As we mentioned yesterday, e-commerce and changing patterns of construction, more off-site, are also disruptive. We expect to see the merchants adapt, as they are doing, especially in plumbing and heating but that will not be without a cost as Wolseley showed on Tuesday. Travis Perkins as the pure UK play will take the brunt of any concerns while Grafton and SIG have substantial and growing Euroland operations that will off-set many UK concerns.

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