Market Commentary - Housing, Infrastructure, Construction and Services 10th February 2017
The updates from Electrocomponents and Shaftesbury provide read across information for mainstream HICS companies today. Carillion was the best mover yesterday, up 1.5% to 222p with 2.6m shares traded. Mears was the back marker, down 0.9% on 1.9m shares traded.
The updates from Electrocomponents and Shaftesbury provide read across information for mainstream HICS companies today. Electrocomponents has provided an update on revenue growth and margin trends for the four months to end January. They show a rising trend. At the group level, L4L and at CER, sales rose by 6% in the latest period compared with 3% in Q2 in 1% in Q1. In the US the recent pace of growth was 12% which combined with 4% in Euroland and 7% in Asia Pac was a good out-turn for the company. GM also rose so the sales improvement was not at the expense of margin. Clearly the geographic reach of Electros and its markets are a bit different than the Materials merchants but the numbers are pretty positive and should aid Wolseley in particular today. Note too that Electros refer to a return to growth in the UK.
Shaftesbury is quite specialised of course being concentrated around the West End from Regent Street eastwards to Holborn so read across is limited. It reports good levels of demand and low vacancy rates in the period 1st October to today at 2.4%. The FX rates and the fact that we have not yet left the EU should have helped traders but as leases being let now extend to 2022 Shaftesbury’s data indicates either confidence that Brexit will succeed or perhaps, as some believe, the true consequences have yet to sink in. Either way the message from this update is positive read across.
Carillion was the best mover yesterday, up 1.5% to 222p with 2.6m shares traded. It was a day when there was little movement in the whole sector but this was positive for CLLN which reports on 1st March. The level of shorts has increased to 23.7% according to Castellain’s data, the highest level we have seen since using this source. This data source no longer tracks holdings below 0.5% so there may be other small positions not included. Some new names have appeared on the list with small positions including Soc Gen and Ardevora. (We note that short positions in the top five have risen in all cases on this data source, Mitie is No 5 at 14.2%. Ocado, Morrrison and Tullow are 2, 3 & 4). Given the yield and the increased price charges for borrowing Carillion stock these are expensive bets.
The new FD at Carillion, Zafar Khan, is not getting a honeymoon period! Despite the evidence the evidence that some sensible guys are taking large and expensive bets against Carillion our sense is that it stands a good chance of trading through, albeit a long process. It has taken a very cautious approach to risk, forced by its situation post Eaga. That benefits the P&L in terms of consistency of course but not necessarily growth. The balance sheet trends grew steadily worse under Richard Adam. As far as the net debt is concerned the terms of trade in construction are getting better with more upfront cash so that might help though the main source of improvement should be trading gains. New methods of mitigating the impact of the pension deficit are emerging fast which should allow some respite from the near £50m of fresh cash used each year to plug the deficit. Using those tools is probably the most readily available source of new cash available to plug the net debt position. And market conditions in the UK and Canada remain positive. So it will be a long haul but not impossible.
Mears was the back marker, down 0.9% on 1.9m shares traded. That is an unusually large amount of stock to change hands in Mears. The fact that shares were transferred in that scale without it affecting the price is a positive, we believe. There are some very positive trends in its markets and at the company which investors have noted. Plus the covenant of its customers is very high as revenue is mandated by legislation in many ways and from public funds. With a short 40p of EPS expected this year Mears is not cheap but the risk levels in the business are low and the full year impact of the high number of mobilisations in social housing and the benefits of service line extension in housing and restructure in care show through in 2017. No pressure chaps!
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