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24 May 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 24th May 2017

There is a substantial amount of news today from Babcock with its finals, Ibstock and Polypipe with AGM updates, HSS has issued a Q1 trading update and Berendsen has issued a punchy rejection of the approach from Elis that includes forecasts for operating profit for this year and next.

There is a substantial amount of news today from Babcock with its finals, Ibstock and Polypipe with AGM updates, HSS has issued a Q1 trading update and Berendsen has issued a punchy rejection of the approach from Elis that includes forecasts for operating profit for this year and next.

Brickmaker Ibstock has made its AGM statement today and Forterra made its statement yesterday. All appears to be very well in UK brick markets as deliveries are higher than last year, though comparators are weak and prices have been achieved that will cover cost rises. As expected the projects that were outlined in the flotation prospectus by Forterra are going ahead; Claughton brickworks will reopen in the summer after a major capital project and Desford will get new gas supply and kiln burners later this year. Forterra promise progress this year and forecasts have been edging up having started the year showing limited progress. Ibstock describes progress YTD as encouraging. It also promises progress this year in terms of earnings and it may get some help from the new 100m brick pa new factory to be opened in Q4 this year. UK brick capacity is rising to meet the increase in new build that is occurring and replace imports, which at one stage in recent years reached 15% of sales. Forterra is expected to produce 23p of EPS this year and could get to 25p next year, the share closed last night at 262p. Ibstock will deliver EPS of 19p this year and 20.5p next year, all according to market consensus and closed last night at 242p.

Babcock’s underlying/adjusted numbers issued today show revenue 7.7% higher in the year to end March 2017 at £5.2bn and operating profit up by 6.5% to £575m. Net debt has fallen by 5% to £1.17bn, 1.8x EBITDA versus 2.0x last year. The only key number that is down is the order book, at £19bn versus £20bn last year. EPS rose to 80.1p from 74.2p last year. The dividend is raised 9% at the full year. The company outlines a number of contract wins in its statement and the emphasis in on their long term nature and the degree on integration its activities have with those of the customers. Relatively new CEO has “re-aligned” the operations into four sectors Marine, land, Aviation and Nuclear; the constant reshuffling of activities around the divisions is not a good sign so let’s hope it’s the last such change for a while. There is enough in the statement to reassure investors but not enough, in our view to alter the views of those concerned about levels of debt and the ability of the business to grow in international and civilian markets.

Polypipe’s trading in the first four months of 2017 was positive with revenue up by 4.6% L4L and by 6.0% at the headline level. UK margins are slightly lower than last year as cost increases are being recovered gradually. The 4.2% L4L rise in sales in mainland Europe (14% in headline terms) is worthy of note as this is based partly on company efforts but also on economic recovery in its territories. That has important read across as well as a benefit for Polypipe shareholders. The most substantial news however is that CEO David Hall will retire in early October this year and will be replaced by Martin Payne who joined late last year at FD. Martin has substantial sector experience having most recently been FD at Norcros and having had management roles at JCB and IMI. The search for a new FD has started and a COO has been appointed, an internal promotion for Glen Sabin.  These moves will be positive for the business as they combine a relative newcomer with substantial experience alongside continuity in the operations with the COO role. The shares closed at the record level of 427p last night.

The size of the task at HSS for new CEO Steve Ashmore is shown today in the trading update for Q1, the 13 weeks to 1st April. In revenue terms the Q1’17 numbers are broadly level with last year given the number of trading days but adjusted EBITA at a loss of £4.5m compares with a profit last year of £4.9m. The number are said to be in line with expectations and reflect parallel running costs as branches are closed and new operating format is adopted. Net debt fell to £226m from £234m which is welcome and dent headroom was £30m at the end of Q1. The company outlines measures taken to raise revenue and reduce costs in the release but the prospect of the need for a further fundraising is not eliminated. The new CEO will take a view after a few months of what else needs to be done. As we stated yesterday some of the problems are systemic and will take a long time to work through. Clearly HSS had a flawed and outdated strategy on coming to market and the wrong financial structure. The balance between trading through the issues and having a one-off adjustment is very fine.

Berendsen’s rejection of the Elis proposed offer is based on its view about the bid undervaluing Berendsen, it being opportunistic, on the combined entity being highly leveraged (i.e. financial risk) and the combined entity having substantial commercial and operational risk due to, among other things, Elis having limited experience of large scale deals. Investors will look at the adjusted operating profit forecasts of £150m this year and £170m for next as the main guide as the other factors are views rather than facts. The forecast are for levels of operating profit that are slightly higher than existing forecasts for 2017 and much higher in 2018 and better than achieved in 2016 (£141m), though they are dependent on FX which boosted the outturn last year. Operating Profit of £170m should produce EPS of around 75-80p next year so at 1173p the implied p/e is around 15x; the stock was trading on c 20x prospective p/e before its two profit warnings. The arguments Berendsen uses are what we might expect and the profit forecast are bold.

The main moves yesterday saw Homeserve get a very positive response to it numbers for 2016/17; the shares rose 12.5% to 790p. Several other stocks rose as well to reach highs, at Rentokil its 1.8% increase saw it breach 260p at close and Polypipe rose 1.5% to reach a record high of 427p. Berendsen was the main faller, down 1.6% to 1080p as the marker was perhaps anticipating that the company will continue to reject the 1173p offer and the price could fall to a level that reflects more accurately current trading.

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