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Stephen Rawlinson
14 June 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 14th June 2017

Severfield, Norcros and Bellway attract attention this morning with releases to the market. The moves yesterday saw Capita storm ahead with a 15.2% increase to 634p as the trading update restored investor confidence and the previous valuation was too low by some distance if the business is stable.

Severfield, Norcros and Bellway attract attention this morning with releases to the market. Severfield’s continued progress is shown today with revenue up 10% in the year to end March 2017 to £262m and underlying PBT up 50% to £19.8m. The company describes the year just ended as excellent and the numbers indicate the management may be right. The fact that the Indian JV kicked in with a £0.2m operating profit share, compared with a £0.3m loss last year says it was very good. The key was some large projects such as Number One court at Wimbledon, Spurs new ground and 22 Bishopsgate and of course completing Anfield. Cash conversion was 112% which aided year end net cash to reach £32.6m. Quite rightly the dividend is doubled to 2.3p a share with the final pay out at 1.6p a share. The question today will be whether the progress can continue and the company indicates that it can. The order book is lower but said to be at a more normal level of £229m in the UK, compared with £315m in November last year and at £73m in India. There seems to be no shortage of projects on which to bid. The company continues to make operational improvements which should help to sustain margins. So at Severfield the scene is set for EPS of 6.0p this year after achieving 5.5p in 16/17. The shares closed last night at 84p.

Norcros seems to have performed well in 16/17 though margins fell a little operating cash flow was very positive and net debt was reduced. Revenue rose by 11% at CER in the year and 15% at the reported level. Underlying operating profit was up 12% at AER. Net debt was down to 23m from £33m last year. Revenue and earnings were boosted by acquisitions which distorts the picture, L4L sales were up 8.8% in 2H 16/17 in the UK compared with a 5% reduction in 1H. The company points to the Referendum affecting sales in the first half last year as the key reason. Norcros refers to its markets as challenging and difficult but they do not seem to be more so than in other years or for other companies; selling is never easy, especially via retail style outlets! UK retail buyers are probably some of the best on Planet Earth. So the read across is positive.

Bellway had a trading update today for the period from 1st Feb to 4th June. The company reports that demand has remained strong evidenced by a 13% rise in reservations in the period and the order book higher at £900m compared with £846m last year. Looking through the statement there is a good pricing environment at present, despite some concerns in the press. The company has continued to add to its landbank so no signs of flinching in the growth objectives at Bellway! The company reports no impact from the General Election but perhaps having had a major election in each of the last four years the public is not accustomed to them and the outcome being that not much changes. The new build segment is really the only substantial source of stock available to the homebuyers so aside from some developments in London the climate remains positive.

The moves yesterday saw Capita storm ahead with a 15.2% increase to 634p as the trading update restored investor confidence and the previous valuation was too low by some distance if the business is stable. The disposals will reduce earnings but create a more cohesive business in the future and a credible balance sheet. We suspect there is still a long way for the price to go. There were few losers yesterday with Berendsen falling a tad to 1212p as the worst faller.

The large rises in Mitie and Capita in the last two trading sessions beg the question whether there is a third we should be looking for. The two main candidates are Interserve and Carillion of course as both have low valuations and difficult balance sheets. The potential is present and for choice we think that CLLN might move first if it can show its balance sheet issues can be resolved. There is confidence that it is trading well in most parts of the operations. Interserve has yet to see officially its new CEO. No doubt there is work behind the scenes. But the problems in construction and energy from waste are difficult to bottom out, especially as outsiders. The new CEO will see it differently of course, otherwise why take the job but some new money from investors seems a likely outcome.

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