Market Commentary - Housing, Infrastructure, Construction and Services 14th February 2017
There is no formal news this morning from UK based HICS stocks. Heidelberg Cement issued its Preliminary results for 2016 yesterday. The complete country by country result and outlook is of limited relevance but the growth shown in the UK market last year and the expectation of a stagnant market here this year is interesting. Morgan Sindall is one of a number of UK contracting based organisations that we believe will surprise on the upside. The others that are near the top of the list include Balfour Beatty and Costain.
There is no formal news this morning from UK based HICS stocks. Heidelberg Cement issued its Preliminary results for 2016 yesterday. The complete country by country result and outlook is of limited relevance but the growth shown in the UK market last year and the expectation of a stagnant market here this year is interesting. Hiedelberg believes it will outperform the UK market due to its geographic footprint and integrated offering. There is limited comment on the UK situation but reading between the lines of what does exist suggests that Heidelberg is surprised at the resilience of the UK market. The read across on UK market comments is consistent with what others are saying.
In the moves yesterday Babcock found support and was the best riser, up 2.2% to 900p. Our comments yesterday about the need for fresh ideas for the group as a whole while sustaining it’s incredibly strong position with UK MoD remain. Morgan Sindall is quietly rising ahead of its results next week. It was up 1.9% yesterday to its highest close since June 2015 at 854p on 35,857 shares traded. Our sense is that the company is trading very positively and forecasts will be nudged higher from current levels by the news next week.
Morgan Sindall is one of a number of UK contracting based organisations that we believe will surprise on the upside. The others that are near the top of the list include Balfour Beatty and Costain. All three are likely to be in position in which weak performing legacy projects are more or less completed and new work is at lower risk, is plentiful and has good cash characteristics. Carillion’s UK operations in contracting and services will also have performed well, we believe and have a positive outlook but the news flow may be affected by balance sheet issues. COST, BBY and CLLN will be impacted by the level of bond yields at end December 2016 which might be adverse for their DB schemes. Costain in particular could rise strongly, especially if it has good news on the ending of the Manchester Waste project.
Capita was the main faller, down 2.4% to 513p. We expected the resolution of its conflict with the Co-op Bank would be net positive for the stock and were wrong. Perhaps the ending of the IT Transformation project with the Co-op was seen as not only a missed opportunity but also raised the concern we have about the company’s ability to compete in IT. There are many global competitors with far greater development resources than those available to Capita. We await news of any equity fundraising and the results for 2016 are due on 2nd March.
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