Stephen Rawlinson
29 June 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 29th June 2017

Babcock has announced it has won a contract and Civitas has spent some more of its equity on social housing stock and Utilitywise has a new FD and an accounting issue has been identified. Kier was the best performer yesterday as its update was seen as reassuring.

Babcock has announced it has won a contract and Civitas has spent some more of its equity on social housing stock and Utilitywise has a new FD and an accounting issue has been identified.

Babcock has announced that it has won a contract potentially worth £500m if it is extended for the intended six year period after the initial five year term. The work will start in mid-2019 and it is to operate air ambulance support for the health service in Norway. The Avincis acquisition provided BAB with extensive experience in running air ambulance services and it now has a fleet of over 300 aircraft in this market segment. The company claims it shows good progress in building international presence, which is a strong claim; it demonstrates to us that it has enormous untapped potential to operate internationally and in civilian markets, that has yet to be exploited. Also winning one project in one country is not the same as winning work across many countries for one customer. While the project does not start for several years, a timescale that is not unusual for BAB this is good news for Babcock as it has been unfortunate with the Avincis deal timing. It is on the way to reducing dependence on the UK and the MoD which was always going to take time. At 895p at close last night the valuation looks harsh as 78p of EPS is expected this year and near 90p next year.

Civitas has announced one of its largest deals to date with the £22m acquisition of 16 supported living properties with 173 tenancies. The announcement is the usual one from the company which is still struggling to find stock and is focussed mainly on assisted living properties at present. The attraction to a registered Provider of a 22-25 year sale and leaseback is not that high, it would seem. Civitas will succeed, in our view and be able in due course to have enough stock to leverage the portfolio but it still has more than £150m of the £350m equity raised, based on our estimates, so it’s going to be some time before it can use its leverage. The company has also made an odd statement about Grenfell tower.

Utilitywise has found a black hole in its numbers. The company had expected to be paid commission based on the energy usage of some of its customers. The company’s business is to act as an intermediary between the wholesaler and the customer offering lower costs to the user and high take off for the wholesaler. But it’s all come a bit unstuck as the customers are not using enough energy so the expected commission level has not been and is likely not to be as high as expected to the tune of £11.2m for the period to 2020. The company receives 80% of the expected fee upfront, based on consumption, subject to claw back if consumption is materially lower than expected. The recent evidence shows the likely levels of consumption to be such that a claw back is likely. The hit to the P&L will be taken this year. The current annual revenue run rate is around £45m. The company is keen to point out that its net debt guidance is unchanged. Whoops.

Kier was the best performer yesterday as its update was seen as reassuring. It certainly helps when you have a number of projects with cost overruns to have some large chunks of cash to cover the problems. The exceptional P&L hit is £135m over the three years 15/6 to 17/18 but the net cash impact is positive £45m over the same period. The important element yesterday was that progress in the mainstream operations in the UK is positive. Importantly the two current elephant project Mersey gateway and Hinkley are progressing well and there are new ones on the horizon that should replace them, such as HS2. Progress on getting 10% CAGR earnings growth to 2020 is more erratic than expected but we are told is still on track and evidenced by the expected returns on investment made in the last 12 months. The shares were 1.9% higher at 1241p with 108p expected in EPS this year and given the current macro environment further gains will be tentative, we expect but are more than likely.

Homeserve was the main loser yesterday, down 2.5% to 727p. The shares have had a good run in recent months so we see this as probably no more than a little bit of profit taking in the most highly valued stock in our universe. The market is looking for 31p of EPS in the year to end March 2018 and 23.5x prospective p/e is at the top end of the valuation range.

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