Market Commentary - Housing, Infrastructure, Construction and Services 25th April 2017
News from three companies provides interesting read across, Havelock Europa (fit out specialist), Carpetright and Vp, the hire company. Serco was the class act yesterday, up 3.8% to 117.9p. Our view has been consistent; inside the operations there is a great company emerging with the right values and systems in place.
News from three companies provides interesting read across, Havelock Europa, Carpetright and Vp, the hire company. Haveloock’s finals for the year to end December were good with revenue up 21% to £59m, despite the loss of a major customer at end 2015 and operating profit was £0.5m, following a loss of £0.6m in the prior year. So Havelock has improved and been able to make a profit; Havelock is not a great story at present but the read across to the fit out operations of Morgan Sindall and Interserve is positive in terms of demand.
Carpetright is a good indicator for housing market conditions as changing the carpet and house moves generally correlate closely. UK trading in the 12 weeks to 22nd April saw L4L sales up by 1.4% despite tougher market conditions; according to Carpet right competitors also found trading tougher. It’s not clear what the comparison point is but that may be being a little petty. Interestingly, for read across to Grafton and SIG, sales in Europe (which is Belgium, Holland and Ireland in Carpetright’s case) also rose 1.4% in local currency which is regarded as part of a continuing recovery in consumer confidence. The read across in the UK, where RMI has struggled since 2008 is OK, but not overly positive, which is consistent with the message so far from the Merchants.
Vp has announced its second acquisition in recent weeks. On 7th April it announced it had paid £3.6m for parts of Jackson Mechnical Services and today it has released a statement telling us it has bought Zenith Surveying Equipment for £3.9m, plus assumption of £2.3m of net debt. Vp has avoided the hire of generalist low end kit (picks, shovels, hedge trimmers, concrete mixers, arrows, drills etc) that can now be bought as easily and cheaply as it can be hired. This extends its operations in specialist kit that needs to be in 100% condition to be accurate and is not used every day on most projects, hence hiring is better than owning for an operator. In the mainstream hirers this is also the direction of travel in terms of equipment but HSS has been left behind in this area, hence its difficulties. It is still piling low end stuff high and trying to rent it cheap; compare the websites for yourself. Vp’s recent trading update (7th April) was positive and indicated it had traded in line with expectations for the year ended 31st March and its results will be released on 6th June 2017.
Serco was the class act yesterday, up 3.8% to 117.9p. Our view has been consistent; inside the operations there is a great company emerging with the right values and systems in place. But from the outside there are concerns about the dividend restarting (it will happen), contracts being retained and new ones won (they are happening) and the old bad stuff being sorted (happening, albeit slowly). The prospect that the business might be renewed swiftly was always remote but when looking back in 2019 it may seem to have been very rapid, such is the degree of change. Some big contracts are still in the mix, Compass and Obamacare the most notable but the big picture is the best place to look. Many will say it’s cheap on a 2/3 year view.
Interserve also had a positive day, up 2.8% to 229.7p. While we believe it has many good contracts the new top team has yet to appreciate the size of the tasks ahead and the £170m provision for waste to energy was a best guess, not worst case. Debbie White, the new CEO does not join officially from Sodexo until September. Investors still need to take care, even at the current level.
Only three stocks fell yesterday Capita, Galliford Try and Mitie, all companies about which there are some concerns, different in each case. Capita may still need an equity raise, Galliford has some issues in contracting and Mitie has still to have its full and final kitchen sinking. The declines of between 0.1% and 0.5% would normally be inconsequential save that on a day when the market rose UK market rose by over 2% a dip is not ideal. But it really was about flow yesterday rather than a fundamental message.
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