Market Commentary - Housing, Infrastructure, Construction and Services 11th May 2017
SIG and Keller have issued trading updates today and Fulcrum Utility Services has announced that CEO Martin Donnachie is leaving after four years in the job to be replaced by current FD Martin Harrison. The moves yesterday were in a narrow range. We spent an interesting morning yesterday at the launch of ilke Homes, a joint venture between Algeco Scotsman’s UK subsidiary Elliot and Keepmoat. The company intends to expand its production of offsite volumetric 2/3 bedroom homes over the next few years through building a number of factories each capable of 500+ homes a year on a one shift/5 day working cycle.
SIG and Keller have issued trading updates today and Fulcrum Utility Services has announced that CEO Martin Donnachie is leaving after four years in the job to be replaced by current FD Martin Harrison.
SIG has told us that L4L revenues increased 1.4% in the first four months of the year with a 0.5% rise in the UK and Ireland and a 2.4% rise in the Euroland operations, all at CER. Including FX impact revenue rose by 6.5%. The company points to fast growth in the air handling operations which delivered a 16.3% improvement in the period. The new top team, which is holding an “Hello and Welcome” meeting tomorrow lunchtime has moved swiftly to close down the offsite manufacture of bathroom pods (Metechno) and taken the decision to shut the Austrian operations; no one-off costs in relation to these actions are mentioned. We shall be interested to know of the plans for the other offsite construction operations as substantial investment is taking place in that segment at present and SIG runs the risks of being subscale and in some cases competing with customers. We believe that investment in offsite is a very sensible idea at present but Distributors may face commercial conflicts. The company has reiterated its commitment to debt reduction as it steps back from past expansion strategies in the short term in order to make a stronger leap forward sometime in the future. We expect the market will greet the update today positively as trading is in line though the first half out-turn will be lower than last year due, in part, to tough comparators there will be growth in 2H, present political uncertainties permitting. The company is expected to deliver 10p of EPS this year and 11p next year which justifies the current price at 124p, up 20% YTD.
Keller is a bit of a mystery company to many as it has no direct UK comparators and it has had a few random warnings that have made brokers nervous about committing on the stock. We like to look at it because, as a piling company (Geotechnical contractors to be formal), it provides an early lead indicator on future activity in construction. The news today is that the company is trading in line with expectations. The geographic mix of performance shows activity in the US to be slid but a tad behind a string 1H last year, EMEA has continued its growth trend and Asia Pacific showed good revenue growth. The read across therefore remains quite positive albeit that progress is steady rather than spectacular. The company tells us that tendering and contract awards remain generally healthy which to us translates into “good but could do better”. The company has also made a separate announcement about the sale of a property for £62m; the tale is complex but essentially the property was acquired in 2016 to settle a long running trade dispute and has been sold at profit of £8m and £4m of rental income has been received, all of which will be treated as exceptional. The impact is to reduce net debt/EBITDA by 0.3x; the ratio was 1.9x at end 2016.
We spent an interesting morning yesterday at the launch of ilke Homes, a joint venture between Algeco Scotsman’s UK subsidiary Elliot and Keepmoat. The company intends to expand its production of offsite volumetric 2/3 bedroom homes over the next few years through building a number of factories each capable of 500+ homes a year on a one shift/5 day working cycle. We saw a pair of semi-detached homes at Gallions Reach yesterday and were given an insight into the strategy. The long running debate about the acceptability, competitive build costs and other advantages of offsite residential construction are starting to be settled after a number of false starts. As more investment is made in production facilities and as the skill shortages in conventional construction become more parent off-site provides many of the required answers. By the end of this year the UK will have enough capacity to provide the core elements of over 30,000 dwellings via offsite methods.
The product we saw yesterday was highly acceptable as a home which can be mortgaged and has longevity and customer appeal. Volumetric production, building the whole dwelling offsite, will require a long timescale to become significant in volume terms but the arrangement between Elliot and Keepmoat provides advantages for both parties that reduce risk and allow “incubation” of the fledgling operations, factors that has been missing to date. Industry operators who dismiss off-site are possibly ignoring the substantial numbers of components and sub-assemblies that are used today in residential as well as other construction. SIG’s withdrawal from making pods in indicative of the scale that is now present in this market and its operation was just too small to compete. Increased use of offsite has implications not just for building but also for the whole supply chain, especially the Merchants.
The moves yesterday were in a narrow range. Mears was the biggest gainer with a 3.5% rise to 517p as 291,162 shares were traded, a high number for the company. Its long term sustainable contracts in Social Housing provide a very stable position and the Care operations which have been restructured may also benefit from recent changes of views about the funding of Care in the UK. Mears is well placed to benefit from the outcome of the election, based on noises about future policies currently being made. Note also that Grafton rose 2.5% to 792p and is getting ever closer to the 800p level. Serco, down 2.3% to 117p, was the backmarker as it retraced recent gains. The move was not significant, in our view and the shares will trade in an 112p-120p band, we suspect, until there is news about new contracts or the dividend.
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