Market Commentary - Housing, Infrastructure, Construction and Services 23rd may 2017
Renew Holdings has delivered its interims to end March today and Homeserve has told us its finals. In both cases the results are good. Morgan Sindall scorched ahead again today with a 5.7% increase to 1257p.
Renew Holdings has delivered its interims to end March today and Homeserve has told us its finals. In both cases the results are good. Homeserve’s adjusted PBT and EPS are possibly a tad ahead of expectations but that may be due to the difficulty for some outsiders to factor in FX tailwinds. Revenue rose 24% at AER to £785m and adjusted operating profit was up by 22% to £119m. The 11% rise in group customer numbers to 7.8m points to more revenue customer (up 2% in the UK and by 7% in the USA, though in the US the figure is flattered by excluding recently acquired USP). Retention rates in the two main territories are stuck at around 80%, with the UK seeing a fall from 82% to 80% and the US level at 82%. The 54% rise in net debt to £261m (1.7x EBITDA) is probably not a concern as £99m of the £90m increase is due to acquisition spend that has yet to make a full contribution to earnings. The company devotes some attention to technology changes in its markets and how it is at least keeping pace with innovations. The company has done enough to show that the strategy is delivering the expected growth and that potential for further advances exists in the USA (e.g. penetration of the addressable market is 6% in the US versus 10% in the UK) but we retain our concerns about the model. More below.
Renew Holdings has continued its surefooted progress with a 9% rise in revenue to £290m at the halfway stage of 2016/17 and a 15% rise in adjusted operating profit to £12.1m, a margin of 4.2% so it is on track for 4.5% for the year, as promised. The strategy of focussing almost entirely on engineering services in regulated sectors in the UK has developed over several years and has been executed well. The only recent blot on the copybook is that it has taken a £5.8m non-cash charge to close the low pressure gas operations that were acquired as part of Forefront as they are loss making; there will be a cash cost of £0.5m from redundancies in addition to this goodwill impairment. Other than that issue progress in the six months to end March 2017 seems to be positive with the order book level at £517m and all revenue for 2H fully secured. Net debt has fallen to £3.5m and by the year end the business should be cash positive, we are told today. Adjusted EPS rose 56% to 15.5p and the dividend was increased by 13% at the interim stage. The shares closed at 456p last night at have made limited progress in recent months as management changes are absorbed. The typically cautious but solid performance in 1H 16/17 should reassure investors that after Brian May’s departure the Renew remains in good hands. The market expects EPS of 32p for the full year and given performance to date and better margins in 2H the earnings risks seem to be on the upside.
It was announced yesterday that Steve Ashmore will take up the CEO role at HSS. He will need all the experience he has learned at Wolseley and Brammer in particular to create the turnaround needed at HSS. The issue is whether investors will have the patience as many of the issues are systemic relating to redundant and old stock, onerous long term leases and long term contracts with some customers that are at the wrong rates. It will not be a swift or easy job as it seems to us as outsiders that the market and customer proposition needs to be altered quite significantly. That will take time and may cost cash which the company does not currently have in abundance. No surprise therefore that despite what seems to be a very good recruitment the share price did not react.
Morgan Sindall scorched ahead again today with a 5.7% increase to 1257p. There were just 32,928 shares traded but clearly demand is high and perhaps only a few investors were willing to “pay up”. Indeed it was a day for construction stocks as recent woes about warnings were on the back burner and Carillion, Kier and Balfour Beatty all rose by over 1.5%. SIG also rose and was the second best increase at 3.3%, closing at 144p. We mentioned the stock yesterday and nothing in our view has altered; a target price this year of 200p is realistic. Our thesis about construction stocks holds up well save that Galliford Try suffered another weak day, the largest faller, down 1.3% to 1255p, the lowest level since mid-December last year. Clearly the unexpected warning about Scottish infrastructure has made new CEO Peter Truscott’s firs year tougher than expected. But with 85% of earnings arising from housebuilding its underlying position should be positive and we suspect it is. The selling is overly harsh, in our view; at this level GFRD looks cheap.
Back to Homeserve as we hold a cautious view on the stock and have seen its share price rise and it became one of the highest valued stocks in the sector; the historic p/e last night was 26x. Our principle concerns are that the company needs growth to succeed, that there is limited transparency between revenue and operating profit, it loses 20% of its customers each year in its main territories (obverse of 80% retention) and that it has continually found difficulties operating outside its core operations. The latter is now increasingly relevant as the business needs to adapt to new technology in the core and new ways of working, hence the acquisition of Checkatrade in the UK. The growth it has achieved is undeniable and we recognise the potential ahead in the US. But we suspect it could unravel at some point.
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