Market Commentary - Housing, Infrastructure, Construction and Services 29th March 2017
Just a few items of note today including more changes at the top at SIG, results for 2016 from Entu and Telford has announced its fourth completed PRS scheme in a deal worth £54m for 112 new homes that will be finished later next year. Ferguson/Wolseley’s numbers were greeted positively yesterday and the stock rose by 5.1% to 5130p. The uplift may in part be in anticipation of the likely change of domicile to the US which should trigger a higher rating.
Wednesday, 29 March 2017
Just a few items of note today including more changes at the top at SIG, results for 2016 from Entu and Telford has announced its fourth completed PRS scheme in a deal worth £54m for 112 new homes that will be finished later next year.
The news from SIG is that the new CEO Meinie Oldersma starts on Monday next and Mel Ewell reverts to being a NED a month later. Also the current Chair Leslie Van de Walle steps down in that role and as a Director when a successor is found and the new CEO is established. So it’s still a bit uncertain at the top of SIG but with both the CEO and FD just appointed the role of new Chairman can wait a while. The stock has had good support YTD as market conditions remain positive and there have been no new shocks so our optimism is well justified and the shares remain cheap, in our view at 113.3p at close. The sequencing of the appointments at the top is unfortunate and there is perhaps regret that the outgoing CEO was able to continue for so long when he was so obviously in the wrong job. The fact that the company continued as it did it, with high resilience, with that leadership is part of what makes us positive; alone that is a thin argument but there are many others that point to good earnings growth and a likelihood of no new surprises.
Entu has faced a very difficult period since coming to the market, much of which might be regarded as self-inflicted. The numbers today show revenue down 2% at £88m and underlying EBITDA in the continuing operations down at £2.7m versus £7.6m last year. The dividend is suspended with an intention of being restored asap. The story of short term bad, good term should be OK is familiar in the sector and that is Entu’s mantra today. We look for read across and the market narrative remains quite positive in the core Home Improvements operations which is what we were looking for. Actions have been taken to reduce overheads, close the Solar panel and kitchen operations and clean up the accounting. We do not know the company well enough to comment on whether enough has been done but the intention is clear and the market remains positive.
The increase in activity in PRS is the main reason to highlight Telford’s news today. The payments schedule from the customer, a subsidiary of Notting Hill Housing, is helpful to Telford and should ease any balance sheet strain caused by its rapid expansion. Telford is now building 483 PRS homes at present. For us that is just the tip of a large iceberg that is creating a whole new market for maintenance activity as well as the new build sector.
Ferguson/Wolseley’s numbers were greeted positively yesterday and the stock rose by 5.1% to 5130p. The uplift may in part be in anticipation of the likely change of domicile to the US which should trigger a higher rating. The company denies that it has plans to alter domicile but the signs have been there for some time that it is the next logical step; the slides from the results presentation six months ago pointed straight at that outcome. Forecasts for the 2017 out turn should not have changed much save to accommodate FX and the structural changes affecting Switzerland and at some point the Nordics. So the consensus 300p of EPS for this year is a reasonable forecast in our view and 17x p/e is not stretching given US growth prospects.
Carillion was the back marker for much of the day falling 2% to 214.7p as there was unfavourable broker comment. As with SIG, and possibly more so, CLLN has shown a high level of resilience and it has delivered two good projects since the results, as promised and there are more on the way. But towards the end of yesterday’s session Capita saw a weakening in support and fell 3% to 553p. Unfavourable comments about its performance on the DIO contract made at Atkins breakfast meeting may not have helped. The DIO management contract has not been a highlight for Capita and its partners as expressed in an NAO report some six months so Atkins was saying nothing new, well not to some observers. The DIO contract is small in the scale of Capita so alone that may not have been the issue as there is more to be concerned about in the short term. The market concern about the need for an equity fundraising can be observed from available data and a view taken. What is much harder to gauge right now for outsiders is customers being more vociferous about the company’s failure to deliver as promised on many contracts, the loss of current and potential employees who go elsewhere and the live contract bids that are now in jeopardy due to the uncertainty. The next two years are going to be very difficult for the company but should the potential for change be credibly expressed by new leadership the share price might lift before the trading performance does, as has been shown at Mitie, G4S and Serco.
We attended the Atkin’s breakfast yesterday and were treated to a good presentation on how the company might increase its sales in the UK. It currently has sales of around £430m a year in the UK Water, Nuclear, Rail and Defence sectors (out of a total UK revenue of £933m) and with addressable markets worth £2.4bn in these areas the company believes it can grow with the market and take share and improve on the 8.7% margin achieved in 1H 2016/17. You know what, we think it’s probably true that it can achieve all three targets as the company has made substantial developments in its capabilities and still has a reputation second to none. The competition has not stood idle of course but its story on innovation, technology and customer relations is not as strong as that of Atkins, from what we hear.
Atkins shares dipped a little yesterday after the presentation which was odd. Perhaps the audience was not quite tuned in to the opening remarks about it firing on “All Cylinders” for the first time since Uwe Krueger became CEO some five year ago. The trading update due 12th April should perhaps be more convincing but investors should not wait until then as today’s price, all things being equal, will be a tad low given the news we expect. The only real downside on 12th April could be the news on the pension deficit which may be quite ugly; perhaps that should wait until the final results!
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