Market Commentary - Housing, Infrastructure, Construction and Services 16th February 2017
News from Dutch engineering consultant Arcadis and unquoted housebuilder CALA tells us that not everyone is taking a half term break. CALA makes a noise at each period end as if is quoted which is a sound discipline of course. Balfour Beatty released its second “Positioning Paper” for this year this morning, entitled “Unlocking the benefits of PF2”.
News from Dutch engineering consultant Arcadis and unquoted housebuilder CALA tells us that not everyone is taking a half term break. Arcadis had a tough time in 2016, according to the 2016 full year results released today, with net revenue falling 4% organically to €2.4bn and the operating margin declining to 7.1% versus 9.6% in 2015. The margin includes a €19m provision release and a €28m restructuring cost so some caution is needed when making a comparison but not withstanding those issues the workforce reduced by 400 employees (2%). Much of the swing arose from a 37% decline in revenues on Brazil due to the recession in that country but performance elsewhere was mixed and the sense from the release is that the weak performance was due both to market and company specific factors. The read across to Atkins is not wholly valid as Arcadis has not put as much efforts into growth, technology and new business ideas as it UK rival, from what we can see. And it has a much weaker home territory in Euroland than Atkins. Our view is that read across exists but is not overly strong; markets for consultants are tough and infrastructure projects are not flowing very strongly yet.
CALA makes a noise at each period end as if is quoted which is a sound discipline of course. In a trading update released this morning for the six months to end December 2016 CALA tell us that reservation rose 24% in the period to 610 units and is strong so far in 2017; it is 80% sold for this year already. Productivity remains well below others with the sales rate at 0.5 despite the improvement; it is up from 0.45 last year as 0.7 is nearer the norm for larger companies in the peer group. The company operates from smaller sites than its rivals which explain some of the difference. The company appears to have few problems in the land market having acquired 1,469 plots in the period at returns above its hurdle rate. The company believes it has the infrastructure in place to build 2,500 units a year, near double the current level. The read across is positive, all is well with the housebuilders so far and CALA’s intentions are clear!
Balfour Beatty released its second “Positioning Paper” for this year this morning, entitled “Unlocking the benefits of PF2”. It is a mixture of thoughts including an indication of the benefits of PF2, a plea for government to get moving with PF2 funded projects and a statement of BBY’s credentials in the space. Fair enough for the company to state its view publicly in such ways. For investors we think this is evidence that the company is in a much stronger position than it was and by 2018 we might see it perform very well. We expect that the 2016 results to be released soon will indicate that the legacy projects are well on their way to being resolved but the nature of big disputes in construction is such that getting agreement takes a long time and doing so on satisfactory terms even longer. The adage that the best outcome is one that leaves both sides unhappy still holds true! Our belief is that BBY shares are good value at close last night at 278p and while two positioning papers are thin evidence alone there is much more we are seeing to support the view.
The moves yesterday saw a return of support for construction related stocks. Balfour Beatty was the best performer, up 1.8% to 278p. As stated above the company is timing its run to be in good shape for 2018 and faster progress may not be sustainable, we suspect. The results in mid-March are likely to show very good progress in the UK and the USA, in our view and we may see new targets for the Build to Last project being released. For investors the better news might be that the cash position is strong enough for more substantial dividend to be paid. The market expectation is for 2.7p for the full year; a move or even the hint of a move towards a 3% yield will be enough to get investors more supportive. The positioning papers should not be seen as a company short of work and are more about getting the right type of work on good terms and getting rid of association with regional contracting at which it was not stellar. Grafton, Polypipe and SIG all rose by above 1% hence our comment about stronger sentiment towards construction.
The bottom end of the table saw Capita and Carillion fall by 3.7% and 2.2% respectively. We commented on Capita yesterday and the difficulties it has created for itself; clarity on strategy, funding and management is in need before strong support is justified. Carillion stands out for not having had a profit warning and created a large kitchen sink full of exceptional items throughout the whole of the post Lehman era and its case post EAGA era. It has had troubled patches but has stuck with its expectations and has not had massive shocks. The share price however fails to reflect that and the low risk approach to projects. The balance sheet remains the issue and there is no silver bullet. There is however things the company can do especially in relation to the pension deficit funding and the strong message in recent updates has been that the net debt must and will fall. The shares are trading on a p/e of 6.2x and yielding 8.7% for clear reasons. We expect it can trade through on a very long term basis but much depends on whether new FD wants to create a clear break with the past or not.
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