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Stephen Rawlinson
31 May 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 31st May 2017

Telford Homes and Styles and Wood, the former a London property developer and the latter a specialist contractor have provided new information this morning. Galliford Try’s analysts’ dinner last night was helpful. The moves yesterday were in a very narrow band with Compass, the leader, up 1.1% to 1661p, a new record level and the largest faller Kier down just 1.2% at 1255p on a large number of trades at 558,596 shares transacted.

Telford Homes and Styles and Wood, the former a London property developer and the latter a specialist contractor have provided new information this morning. Telford’s finals for 2016/17 show revenue up by 19% to £292m and operating profit rose by 8.1% to £37.3m. The reduced operating margin is due to an increased proportion of PRS units in the mix, which are often sold at a lower margin than individual sales to de risk projects and improve capital return. That factor also explains why margins at 12.8% are lower than the industry average. Investors also are aware that the company uses percentage of completion, taking a proportion of the expected revenue and earnings each period on large scale work that is not yet completed. Given the pre-sold nature of many of Telford’s developments that does not overly impact on revenue adjustments but could expose the company to some dangers on costs adjustment, depending on movements in cost and contract terms.

The key aspect of Telford’s news today is that the London market is, in its view, still undersupplied. That leaves scope for Telford to build in the non-prime areas of London and increasingly do so for PRS operators who last year accounted for 77% of sales compared with 24% in the prior year. The target market switched substantially last year away from individual investors to corporates. Owner-occupiers accounted for three percent of sales last year compared with seven in the prior year. The future mix of buyers is likely to alter, depending on the mix of developments. We do not cover Telford in depth so remarks are focussed on market issues. Reading between the lines the sense is that demand has weakened a little in some parts of the market but overall remains robust. The devaluation of sterling has made Telford’s products more attractive to overseas buyers offsetting the negative impact of other factors, such as stamp duty changes. The company is more forthright about the need for Brexit negotiations to provide some certainty on the rights of overseas workers in post EU Britain. In summary, Telford is seeing good market conditions in its niche in London dwelling development but the accent on de-risking by forward selling, while part of the developing model, is also driven in part by market considerations.

Styles and Wood’s AGM update tells us little other than trading is in line and that the order book is strong (up 36% on last year at £137m), reflecting what seems to be good demand in the construction sector. The read across from S&W to Morgan Sindall and others operating in similar services is positive.

Galliford Try’s analysts’ dinner last night was helpful. The share price has yet to recover after the strategy presentation on 21st February were closely followed by two unexpected events, the opportunistic proposed bid for Bovis and the £98m exceptional cost announcement on the Aberdeen ring road and Forth road bridge. The meeting was intended, we suspect, to reassure us that the strategy is still intact and despite the potential cash costs of the two troubled infrastructure projects, the 20% pa growth promised in February is not jeopardised. We never really doubted that was the case, the greater concern being whether there are any more issues to come and whether it might grow faster in some areas to fill any cash gap in the plans. On the former GFRD operates in contracting so it can never say never. But recent work has been won on terms than have a much lower levels of risk, a situation more common across the industry and examination of the other projects shows manageable risk levels, certainly assessed as manageable within current guidance. On the issue of faster growth in some areas it certainly seems possible that Partnership Homes could grow more rapidly than expected, without risk levels rising. The company share the industry view that the top five UK housebuilders are unlikely to raise output volumes substantially from current levels so growth in new build will come from Local Authorities, PRS operators and Housing Associations. Enquiries from these areas and expected future demand point to potential outperformance. Galliford Try is cheap with 163p of underlying EPS expected this year and the price at close last night at 1240p, yielding 7.6%. It will take time to restore reputation and build investor confidence, we believe but the foundation is solid. What is clearer is that the company is less wedded than it was to remaining a hybrid in construction as well as developing and building dwellings.

The moves yesterday were in a very narrow band with Compass, the leader, up 1.1% to 1661p, a new record level and the largest faller Kier down just 1.2% at 1255p on a large number of trades at 558,596 shares transacted. There was not much to read into the moves yesterday. It is half term so there seems to be limited appetite for big news and large market moves, despite the sentiment changes in Whitehall. The economic data, while it has been better, remains robust tough devaluation has not yet really had an impact on output.

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