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Stephen Rawlinson
2 June 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 2nd June 2017

Half term, election next week and the sun is shining so little surprise there is limited new news. On house prices the City has gone quiet on the risks facing the sector. Regular readers will be aware that we have been a fan of SIG and this morning LXi Reit plc has announced that it has paid £9.3m to buy a 250,000 sq ft/15 acre facility near Carlisle used to cladding and components and sub-assemblies by the Distributor.

Half term, election next week and the sun is shining so little surprise there is limited new news. Today we hear that UK house prices fell 0.2% between April and May and are now up just 2.1% nationally on an annual basis, according to Nationwide. SIG has done a sale and leaseback on its cladding factory in Cumbria worth £9.3m and WYG has announced new work that the company estimates will be worth £50m over the next three years.

On house prices the City has gone quiet on the risks facing the sector. Share prices are up near 20% on average in the sector YTD. Fears of lower house price growth, perhaps even declines have been allayed by the housing shortage and the stress tests now applied to mortgage lending under MMR. The average house price in England and Wales is now 7.6x UK average earning according to the ONS, with the median price up 259% between 1997 and 2016 and average earnings up 68%. It could be that the optimists are ignoring the potential impact of lower immigration. The data on the lack of housing is real and lower prices do not necessarily translate into lower volumes. But clearly the housebuilders are faced with undeniable pressures now from slower price growth and higher labour and material costs. For some this news from Nationwide may signal the start of a dip in house values as it has a familiarity to it. As Twain said, “history may not repeat but it sure does rhyme” and we have been in a situation of political uncertainty (which the election may not cure) and high average price to income situations before. The arguments are too complex for a morning note so let’s just leave it that there are signs showing that house price growth has stalled and the issue is whether that causes buyers to hold off, because if they do in expectation prices will be lower tomorrow the prophecy might be self-fulfilling. The counter arguments around the shortage of stock and the encouragement to demand provided by government have been robust enough so far.

Regular readers will be aware that we have been a fan of SIG and this morning LXi Reit plc has announced that it has paid £9.3m to buy a 250,000 sq ft/15 acre facility near Carlisle used to cladding and components and sub-assemblies by the Distributor. The initial yield is 7% and the term of the lease is 25 years with no break clause. SIG has made no announcement today, perhaps because in the scheme of things this is not that material. We believe it is another step forward for SIG in terms of reducing its net debt, a key priority and clearing out things it does not need to do, such as own freehold property. The terms of the leaseback seem to be generous alongside other deals but that would be nit picking. We are not aware of the market conditions in Carlisle for large, single use production facilities so it’s not clear what level of competition was created for this asset. What we do know is that it is the right way forward for SIG and releases capital to reduce debt and in due course earn 15-20% ROCE for SIG shareholders and that has to be progress. We see few reasons stopping SIG moving swiftly towards 15-17p of EPS if it gets the right relationships with its suppliers and that means target prices for the shares of 200p from the larger brokers, in our view. The shares closed last night at 154p.

WYG’ s share price has had a tough time since the referendum as a meaningful part of its work arises from EU funds and from the much criticised DiFiD in the UK. The arguments that it will continue to operate its EU dependent operations from within the EU has held limited sway with investors and the price has hovered around 100p recently versus a close of 135p on 22nd June 2016. The shares climbed back from post referendum lows but the warning of project delays in late March saw the price slide back to the 100p area. The new contracts announced today from the MoD (£12m over three years), Crown Commissioning Services (£3m pa/two years) and in South Africa with the Climate Resilient Infrastructure Facility (£2.5m pa/two years) are signs that good progress is being made. So up one ladder again and hopefully for investors there is not another snake ahead! Our sense is that the company will get through the short term issues ahead. There were many ways to get around any issues it faced in winning EU funded work and in many ways it was resilient as one of the few providers of the type of work that it does in economic and social development in disadvantaged areas. With EPS of 11.5p expected in the year to March 2017 (not yet reported) and 13.5p for the current year WYG looks cheap at 101p.

Grafton was the clear leader yesterday; up 2.5% to 796p as it moves slowly back to over 800p. Good news on Euroland economic recovery will help the business and in the UK demand remains resilient so its approaches to sales and marketing should be paying off. Carillion had a positive day rising 2.4% to 208.3p; we have been patient with the stock and remain positive as we believe it can trade through its balance sheet issues. The interims are due in mid-August and while new FD Zafar Khan has had little time we may see a new approach to handling its twin problems of high net debt and a high pension deficit. The commitment to lower debt was made at the full year results announcement in March. The half year is not the best time to judge progress but no doubt indications of the 2017 year end position will be provided and we expect them to show expectations of substantially lower net debt.

Serco was the back market, down 0.8% to 117.8p. We read little into the move as it’s small and follows a period of share price strength after which a small amount of retrace is quite normal. Polypipe was the next weakest performer, down 0.8% to 414p for similar reasons. These moves have no real new information to offer about two well run businesses operating in good markets.

 

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