Market Commentary - Housing, Infrastructure, Construction and Services 24th January 2017
Lakehouse and Crest Nicholson treat us with news today, both with year end results. The former to end September, the latter to end October. Lakehouse has done a lot in the last six months under its new Chairman, Bob Holt. The key has been to restructure the division that was called Regeneration, now rebranded as Property Services. Crest is riding the housing wave as might be expected from an experienced leadership team.
Lakehouse and Crest Nicholson treat us with news today, both with year end results. The former to end September, the latter to end October. For Lakehouse the actions taken to get the business on the right track are as relevant as the numbers for last year. The company has made a rocky start to life as a publicly quoted stock so the news that it has taken steps to get back to basics should be greeted well. The company had revenue of £306m in the year, down from £336 in the prior year and underlying EBITA halved to £11m; despite a statutory loss before tax of £33m the company is expecting to pay a final dividend of 0.5p (1.5p for the full year) and net debt was £21m at end September. Crest Nicholson, as might be expected showed a good performance in 2015-16 with revenue over £1bn for the first time and ROCE was over 30%. The comments on the housing market refer to it being robust and the company believes it can grow revenue by 40% by 2019, based on the market as it sees it and the foundations for progress it has already put in place, in terms of land, supply chain and financial capital. More below.
The timetable which we attached yesterday had just one error which is that Carillion’s 2016 full year results will be released on 1st March 2017 not 2nd March as we indicated.
G4S is on a mission and is up 7.2% YTD closing at 251p last night, up 1.9% yesterday. We have indicated for some time our view that this is the year in which the near four years of restructure started by Ashley Almanza, post the departure of Nick Buckels, starts to show real results. Maybe a few others are coming to that view as well and 300p is mooted as realistic target by many observers. Indeed it was a day for redemption of “sinners” (some reformed, some still work in progress) all round with Capita up 1.9% to 523p, Berendsen up 1.1% to 854p and SIG up 0.8% to 105.9p. Even Mitie managed another increase to 204.6p, up 0.3%. Of course the full story is not yet out in some cases and the new CEO is not yet appointed in others but you get our drift. There seems to be a bit of buying of the potentially undervalued stocks that have been through difficulties. Serco and Balfour Beatty were absent from the revival and were level on the day; they have had their days in the sun as well so no harm missing out a little yesterday.
The sector performed a tad better than the market yesterday and the chatter about M&A in the housing sector may have helped. Bovis closed up 3.5% on the day but then it had a sluggish close to last week. The rise in the price at Bovis does not suggest a widespread view that a deal is likely. There were few fallers in the sector but we note that Homeserve has struggled recently, down 3.4% YTD and 0.7% yesterday. We are still not convinced that the business model is as effective in difficult market conditions as it is in growth phases.
Lakehouse has done a lot in the last six months under its new Chairman, Bob Holt. The key has been to restructure the division that was called Regeneration, now rebranded as Property Services. The main thrust of the messages is that three of the four divisions, (Compliance, Energy Services and Construction) were in reasonably good shape but needed some improvements. However, the Property Services operations had taken too much risk in its contracts and was doing too many of the wrong things. Substantial measures have been taken to improve the business operationally in terms of risk control, pricing, the type of work undertaken and operational management. While it is still early days in the improvement development management is signalling that the transition phase is over and now it’s a case of rebuilding that part of the company. What is most interesting is that the company makes no mention of a lack of work or challenging markets, from which we conclude that it does not see any unusual difficulty in rebuilding from the viewpoint of its markets. The order book has fallen by £52m to £543m (just short of 2x revenue) said to be due to caution in taking new orders in Property Services; the value of frameworks to which it has access rose to £1.6bn from £1.3bn in the prior year. 87% of expected revenue for this year (which is four months old) is already visible, we are told. So it would appear the scene is set for 16-17 to be a year of much less drama and a slow process of rebuilding the company on a stronger base. The likelihood of the business reaching £350m revenue by 2017-18 is high and that could mean EPS of some 10-12p based on operating margins of around 6% and a low level of interest cost. It’s not without risk of course but at 35p per share at close last night the rating looks to be quite low. There is a meeting at 9.30 which we shall attend.
Crest is riding the housing wave as might be expected from an experienced leadership team. That is not to say it is easy and 2016 presented some known challenges in the market. The key data looks to be strong, revenue up 24% to just over £1bn, operating margin level at just over 20% and PBT up by 27% to £195m. Sales volumes were up 5% last year and the ASP rose by 18% reflecting mix and location; the message is that the current price levels are the mid term levels, plus/minus market moves so future growth will be biased more towards volume. The concern might be that the higher price levels means more volume is to second time buyers thereby giving more exposure to chains in the market. The company has increased the dividend by 40% to 27.6% for the year, 2.3x covered. The company makes positive comments about its training and health and safety during the year and about its investment in offsite products and expertise. The land pipeline is reduced to 32,927 plots in total, including strategic land, from 33,776 in the prior year; this was the result of the pause in buying in the summer, post the Referendum. That had the positive impact of increasing net cash to £77m at the year end from a net debt of £31m in the prior year and we suspect that a short term land bank of some five years at current output is sufficient for now. But to grow to 4,000 units may require some investment, depending of the timing of detailed permissions being achieved. No real issues at Crest, it really depends on the market in the South east, around the M25 remaining robust
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