Market Commentary - Housing, Infrastructure, Construction and Services 10th March 2017
There is limited newsflow today. The OFCOM decision that Openreach will remain part of BT but on an arm’s length basis should be treated as positive for Carillion in particular but also the utility supply segment in general. Capita saw some support yesterday, rising 4.6% to 549p as investors struggle to work out whether the current level is a great buying opportunity or not.
There is limited newsflow today. The OFCOM decision that Openreach will remain part of BT but on an arm’s length basis should be treated as positive for Carillion in particular but also the utility supply segment in general. It avoids the upheaval that hiving off Openreach might have created for Carillion, the largest supplier of network support to Openreach. It also holds out the prospect that more will be spent on the network which some observers regard as being needed but held back due to BT’s approach and its finances. Civitas Social Housing has spent a little more of the £350m it raised a few months ago and has paid £9.1m for a portfolio of 20 supported living properties (freeholds and leaseholds). The initial yield is 6% unleveraged.
Capita saw some support yesterday, rising 4.6% to 549p as investors struggle to work out whether the current level is a great buying opportunity or not. There is no obvious CEO candidate operating in the quoted area at present and new leadership with such experience is essential sooner rather than later. The Chair has not led a quoted entity before. Our view is that having experience of leading quoted entities at Chairman and/or CEO level in an investee company is a very important consideration. On the fundamentals at Capita it seems to us that when all of the restructure is completed, and it take a couple of years, what remains will be a company with operating margins of 10-12% and revenue of £4-4.5bn. Disposals and some time for operating cash to accumulate, could be enough to avoid an equity fund raise. So the possibility of there being an attractive business with EPS of 50-60p a year at current tax rate is a real possibility and there is no 100% certain case to reduce the dividend. For patient investors who are prepared to take some risk CPI may be an opportunity but getting leadership that understand the City is crucial if Capita remains an independent quoted entity.
Wolseley was the weakest performer yesterday, down 1.4% to 4960p as it has ceased to get further Trump Bump boosts. A few week’s ago when £ fell against the US$ Wolseley’s share price rose but that effect has diminished as well. The company is scheduled to deliver its half year results on 28th March. We expect they will be in line with expectations but cautious in tone. The UK Plumbing and heating market is clearly still very difficult and while it comprises around 10% of WOS total revenue it has been one of its more difficult areas; the news from Travis Perkins and Grafton show the difficulties faced by the traditional companies in the space are not resolved. At the current level and with around 300p of EPS expected this year WOS is priced for the news being good and there being no adverse shocks. In that context we draw attention to Homeserve, which is also highly dependent on US activity and $ FX; the shares are down 10% from the mid December peak and in our view are vulnerable. They closed 0.5% down yesterday but have further to fall , in our view as market conditions in the UK and the US have been unhelpful in the final quarter of its financial year, ending 31st March.
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