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28 March 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 28th March 2017

Wolseley has produced a solid set of numbers at the half year with organic growth in revenue of 3.2%, which translates to 6.7% at CER and 24.5% at AER. G4S was the most popular stock in our universe rising 1.5% yesterday to 302p. Predictably Babcock was the back marker after its news yesterday on the Magnox nuclear decommissioning contract. It fell 4.3% to 877p.

Wolseley has produced a solid set of numbers at the half year with organic growth in revenue of 3.2%, which translates to 6.7% at CER and 24.5% at AER. The gross margin at group level is up 0.3% to 28.6% but trading profit margin at AER is level at 6.1%. We shall need to get accustomed to a new name at Wolseley, it will in future be called Fergsuon as the US accounts for 84% of operating profit and that is the brand name used across the Atlantic. At the last set of results the logical conclusion from the presentation was that domiciling the business in the US was the best course of action and the change of name is possibly another step in that direction. Certainly the struggles with its operations outside the US must also be of concern. The pattern of trading across the geographies reported today is familiar with the US showing revenue growth of 9% in the period but the Nordics and Canada and Central Europe declining and the UK with just 0.3% revenue increase. The company has announced today that it has started a process to exit the Nordic area. The business appears to be on track for the year as a whole and there is no hint here today that forecasts need to drop. Sales since the end of the half year are up by 4.5% at group level and 5.5% in the USA.

Redrow has announced that it does not intend to make an offer for Bovis above the level which has already been rejected and will therefore focus on growing its existing operations. There may be further twists and turns but this leaves the field free for Galliford to buy the business should Bovis shareholders be willing to accept its offer. There will be little bit of surprise today that Redrow has withdrawn as it has stalked Bovis for many years but equally Steve Morgan was never going to get near to potentially overpaying for the company, that is he would not pay a “strategic” price in his view. Galliford Try will have its own view on value and equally is not likely to pay a premium for Bovis so the decision is now a bit clearer.

Severfield’s trading update indicates that the 2016/17 will be ahead of expectations in terms of earnings and cash and the business is on track for further strong growth. The only data provided is that the order book remains strong at £267m. The trading news is overshadowed by news that CEO Ian Lawson is unwell and is replaced temporarily by FD Alan Dunsmore and Chairman John Dodds will assume an executive role for a while. Let’s hope Ian has a speedy recovery.

G4S was the most popular stock in our universe rising 1.5% yesterday to 302p. The message from the results is starting to get through and at present 300p seems to be the level, plus/minus 10p.  It was closely followed by SIG, one of our picks for 2017, which closed at 112.7p, a level at which it seems highly resilient. The new CEO and FD are ready to grow the business from its strong base, from what we can see. We stick by our view from the start of the year that a substantial rise (+50%) from 103p at 31st December 2016 by the end of this year is possible. The revenue level, the average margins in the sector and the prospects in growth areas such as SIPS and air handling suggest that current forecasts could be well short of the likely outcome, even this year and certainly for 2018.

Predictably Babcock was the back marker after its news yesterday on the Magnox nuclear decommissioning contract. It fell 4.3% to 877p. The damage was subdued, due in part to it being anticipated and also because as the company has time to fill any gaps in revenue and earnings, which it says it shall do. Believe us; the company would love to have kept the contract! The company needs to become more credible in the post Pete Rodgers era. It’s difficult for the new CEO, Archie Bethell, as the “rules of engagement” in a company with Babcock’s ambitions and scale make it tough for an internal appointment, especially given its goal of geographic expansion.

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