Market Commentary - Housing, Infrastructure, Construction and Services 8th May 2017
Costain has issued a very short statement today to coincide with its AGM. Centrica’s update today is interesting for its comments on energy price caps. Friday last was a good day for stocks that have been out of favour in the last few months. The sector did a little better than the market last week with a 2.0% increase versus the market up by 1.1%. YTD the HICS stocks are up 10% with the housebuilders leading the way, up 12%, versus the 3.3% rise in the All Share.
Monday, 08 May 2017
Costain has issued a very short statement today to coincide with its AGM. The company has said it is trading in line with expectations and that is very much it. The company’s focus on substantial projects for larger UK customers in energy, water and infrastructure is well known and is yielding good results. The termination of the Manchester Energy from Waste deal was announced last week and the resolution of that project is nearer to a conclusion; it has been a drag on the financial numbers for some time but the share price has started to indicate investors can see an end to the losses on that work. The stock closed at 475p on Friday last, still some way short of the peak of 567p in 2006 but well ahead of late 2007 levels of 171p. Market expectations of 33p of EPS this year and 36p next year should be fulfilled and may be higher depending heavily on the Manchester waste outcome.
Centrica’s update today is interesting for its comments on energy price caps. The company makes a bold counter argument to the notion that price caps on energy bills to consumers are a good thing. Direct state interference in the manner described is likely to reduce the attractions of investment, which clearly has read across to the stocks covered here. Its early days in that battle but Centrica states that it has proposed alternatives to price regulation to the Government and there is an ongoing dialogue. If the UK is to return to more manufacturing and be a sovereign nation then domestically produced energy is essential and right now that means much more investment, a positive for Balfour Beatty, Costain, Carillion and others.
News this week is expected from Grafton tomorrow with its AGM. On Wednesday Compass reports its interims and on the same day Marshalls, Barratt Developments, Galliford Try and Rentokil have AGMs though only the former two might update, the latter two having done so recently. Thursday will bring AGM updates from Keller, Serco and SIG. And on Friday Interserve and Tyman will no doubt update with their respective AGMs.
Friday last was a good day for stocks that have been out of favour in the last few months. Interserve was the best performer up just 2.1% to 241p, Carillion up 2.0% to 215p and Serco up 1.9% to 119p. Arguably the rises are small and were just ebb and flow of trading on the day. At present we see limited logic for a positive move in Interserve as its new CEO is not scheduled to take up the role until September and there has been little new news; Debbie White joins in the top job from services company Sodexo and starts with substantial issues in the Construction segment at IRV. Carillion’s operations are thought to be trading well in most regions (notwithstanding any relevant read across from the Aberdeen road) and assuming the dividend is maintained at current levels a buyer will get over 14% return from that over the next 12 months (two finals and an interim) as the stock goes XD on Thursday. Serco is regaining ground lost when the most recent guidance pushed the recovery in earnings slightly to the right. Recent contract wins point to a positive trading update more than balancing other current threats.
G4S slipped in trading but the 2.1% fall to 318p was just retracing earlier gains after the trading update and just a bit of short term profit taking, in our view. Balfour Beatty also slipped a tad, down 1.8% as with Carillion it is highly concerned about the outcome on the Aberdeen ring road but experienced enough to know that with around a year to completion there is a lot to resolve and agree.
Moves last week
The sector did a little better than the market last week with a 2.0% increase versus the market up by 1.1%. YTD the HICS stocks are up 10% with the housebuilders leading the way, up 12%, versus the 3.3% rise in the All Share.
Mitie was the best performer as the update last week was the new FD’s chance to draw a line under the history of the previous management’s approach to financial reporting. The outcome was not as damaging as the worst case the market could think of so there was a sense of relief. We have said for some time that in the core FM operations Mitie was and remains a good business, just not as good as the numbers suggested and outside FM the top team always struggled to buy properly. At 236p at close on Friday the shares might just be ahead of events but not by much. Also note last week’s rise in SIG’s price of 5.5% such that it is now up 22% YTD; we expect good news at the AGM this week and with Euroland recovery it is well positioned, alongside others such as Grafton which also has € exposure.
No surprise that Galliford Try was the largest faller, down 10% last week after its unscheduled update informing us of a £98m hit to operating profit. The provision for potential losses on the Forth Bridge and Aberdeen ring road projects (with a suggested 20%/80% split) was unexpected at this stage, at least on the latter. Balfour Beatty and Carillion are also involved in the Aberdeen project and remain highly concerned about progress but are trading the situation at present as it is some way from completion (over a year) and there are claims and counter claims as always with such work. The EV of GFRD fell by around £100m last week which stacks up against the potential loss in one area but good performances elsewhere.
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