Stephen Rawlinson
28 June 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 28th June 2017

Kier’s trading year end update ahead of a CMD tomorrow is the main news this morning. The one-offs will attract attention but should not be allowed to overshadow what appear to be positive results to come in most areas of the operations. The moves yesterday were almost all downwards. The reality that interest rates are going up at some point, the UK economy is slowing and that political uncertainty is creating delays is starting to be realised.

Kier’s trading year end update ahead of a CMD tomorrow is the main news this morning. The company indicates that it is trading in line with expectations, which we believe are for EPS of 108p in the year about to end and for PBT of £129m, a 3.3% rise versus last year. But attention in the 8.00 am conference call will be on the increased provisions and cash costs associated with the withdrawal from the Caribbean operations and the news that there are substantial other exceptional P&L costs to be booked in 2H’16 that were not previously known and some have cash implications. In total these amount to £75m of additional exceptional P&L hits in the second half of the year. The largest hits to the P&L are an additional £23m in the Caribbean operation (making the three year total exceptional in that area £79m) and £23m provision for work in Hong Kong. On the latter the projects were known to be ending but the prospect of a large one-off loss was not mentioned. The other P&L “damage” is from HSE fines (£8m), the sale of a renewable energy operation (£9m) and reduced recyclate income and contract closures in the environmental services area (£4m).

There is a reasonable case to make that the cash impact is offset by gains from the sale of Mouchel Consulting, the release of cash from setting up the JV with Cross Keys Housing and a £17m payment from Hong Kong due next year. The exceptional cash costs of £107 for the three year period is mitigated by £152m of one-off gains. The industry is it must be said one of risk and the fact that there are assets that can be traded to offset situations in which undue risk was taken (with hindsight) is a good thing. It does however make investors nervous. Kier has always had such “reserves” to draw on which have helped in the past and this is another phase. Out snatched conversation this morning with the company points to the exceptional now being fully completed and signed off.

The one-offs will attract attention but should not be allowed to overshadow what appear to be positive results to come in most areas of the operations. The cash created from the disposal of Mouchel Consulting was swiftly used up on projects in Residential and Property (£81m of new investment in these areas in 16/17 that should deliver returns at least in line with the Group’s 15% hurdle rate. In residential demand remains strong in the geographic areas and market segments in which the group operates. In the Services area the sluggish first half bounced back in 2H, based not just on government spending the budget before the year end of March. The company points out that its net debt will around £150m at the year-end which is below expectations and the £30m lower than the half year situation.  There are many good things happening in the business and demand for its services in the UK does not appear to be an issue. The share price will probably take a hit this morning after closing last night at 1220p, down 0.4% on the day; the price has been winking at us for a few months. Any decline creates an opportunity as company gets back on track to achieve its 2020 vision goal of 10% CAGR in earnings.

The moves yesterday were almost all downwards. The reality that interest rates are going up at some point, the UK economy is slowing and that political uncertainty is creating delays is starting to be realised. We are moving to risk-off. However, the 6.1% fall in Mears to 451p yesterday had little to do with macro factors. The trading update was positive but contained enough elements of doubt to suggest that the risks were tending towards down not up. They included revenue being a tad lower than expected in 1H and the contract attrition in Care being slightly more than expected. Our sense is that these are just blips and that the strategy is intact and will deliver this year and into the mid-term in two areas of essential service provision. The selling yesterday was, in our view, overdone.

Breedon was the best performer with a 2.8% rise to 88.8p. The market likes its combination of exceeding expectations, entrepreneurial approach to marketing and selling and assets that are very difficult to replace.

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