Market Commentary - Housing, Infrastructure, Construction and Services 30th January 2017
Two tiddlers make the news with trading updates today and consultant WYG has a new Chairman. James Halstead, a company that makes and distributes flooring in the UK indicated on 2nd December, five months into the new financial year, that the sky was falling due to weak sales and rising costs.
Two tiddlers make the news with trading updates today and consultant WYG has a new Chairman. James Halstead, a company that makes and distributes flooring in the UK indicated on 2nd December, five months into the new financial year, that the sky was falling due to weak sales and rising costs. Press chatter about CH2M and Atkins merging is likely to have some credibility, in our view. Our sense is that this one is unlikely to work as the ownership structure is hard to envisage and Atkins come with a £300m pension deficit costing £33m+ in deficit payments alone each year; the Trustees will want substantial guarantees in any deal.
Two tiddlers make the news with trading updates today and consultant WYG has a new Chairman. James Halstead, a company that makes and distributes flooring in the UK indicated on 2nd December, five months into the new financial year, that the sky was falling due to weak sales and rising costs. Well, the sky did not fall, December trading was very positive and the company expects to hit expectations for this year. Consulting engineer Waterman has updated ahead of interim numbers to be released in less than a month’s time, 28th February. Trading is in line with expectations which are for little change on last year and WYG has a new Chairman. Mike McTighe was appointed Chairman at Open reach late last year so it was inevitable that after near eight years at WYG he might move on due to the length of time in the role and the demands of the new one. McTighe had a useful phase in corporate rescue at WYG and Heywood Williams in the post Lehman period. He is succeeded at WYG by Jeremy Beeton who has been on the board since October 2015.
This week we expect to hear from Alumasc (Interims) and Carpetright (Update on Tuesday, Low and Bonar (Finals) on Wednesday and Compass (AGM Update) on Thursday. Most of the data will be useful read across rather than anything else.
Press chatter about CH2M and Atkins merging is likely to have some credibility, in our view. Man size in the world of global consulting engineers in nearer to the size of Aecom which had $17.4bn of revenue in 2015-16 (ending September) rather than CM2H which had $5.4bn revenue in its last full year and Atkins which has a current revenue run rate of around $2.5bn. Whether talks are taking place is not confirmed nor is there any clue regarding the likely legal and ownership structure. As CM2H is employee owned, save for a recent injection of cash from Apollo ($300m), its not 100% clear how the deal will happen. It may have been thought that CM2H would be interested in other employee owned UK based consultants such as Mott McDonald and Arup, and maybe it is, but doing a deal with them could be more tricky, contain similar expensive pension issues which it discovered at Halcrow and they do not have Atkin’s global reach. Our sense is that this one is unlikely to work as the ownership structure is hard to envisage and Atkins come with a £300m pension deficit costing £33m+ in deficit payments alone each year; the Trustees will want substantial guarantees in any deal.
Compass was the best riser on Friday last with a 1.8% bounce to 1417p. It may be that the news of Tesco’s bid for Booker, along with the associated news that the deal may have had something to do with Richard Cousins leaving Tesco as a NED, brought a sense of relief. But it may also have caused shareholders to recognise that Richard is still very important to CPG’s development and that the current valuation is normally associated with a faster revenue growth rate than the c 5% the company is likely to deliver. The share buy-back process is continuing which provides a boost to EPS but margin growth from here is difficult. Our belief is that the shares will struggle to get back to 1500p+ in the short term without some change in the story; that may include buying bolt-on on a rating of 10-15x earnings instead of buying its own shares on 20x.
Carillion was the back marker on Friday last falling 3.3% to 220p. The graph shows a steady decline from the most recent closing peak of 362p in July 2014. The shorts remain at around 22% of the stock according to Castellain Capital. To date we have been confident that the company should be able to trade through its issues, albeit a long term process. New FD Zafar Khan has a lot of work to do on the net debt, pension deficit and reverse factoring; undoing some of Richard Adam’s ways of doing things will take some time as well. The company has gone quiet on us which is not usually a good sign. Its financial situation, post the expensive Eaga acquisition, had made it more risk averse earlier than many rivals which was a good thing, in our view. It also pushed it more towards “safer” services activities and investment in its systems and processes which have given it competitive advantage. The final results for 2016 are due on 1st March. At present though it looks as though the market is running out of patience with a lack of solutions to the balance sheet issues which Richard Adam never solved.
Moves last week
The sector fell a little more than the market last week as it struggled with macro headwinds from interest rate chatter. The market fell a little, down 0.1% and the sector by around 0.5%.
The largest faller was Carillion, down 6.7% to 220p and we have discussed the stock earlier. The other faller to mention was Interserve which faces similar issues and is in a similar space to Carillion; it fell 3.6% last week. It looks as though holders are running out of patience with these two and shorts are increasing.
The main riser was Mears, up 6.2% last week. It operates in services in the UK, as do CLLN and IRV but it has a different place in its markets which have a steady stream of spending back in place. It also has a stronger balance sheet than the other two and a highly granular IT system that provides real time understanding of exactly what is happening on projects and the cost of them. It also won an £86m contract from a housing association in Manchester last week, which was not announced formally, we suspect because it was just part of normal operations.
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