Market Commentary - Housing, Infrastructure, Construction and Services 3rd March 2017
Berendsen has produced solid numbers this morning, in line with the reduced expectations set in the late summer. The news this morning will not put the stock back at its previous valuation, in our view. Carillion bounced a little yesterday and was the best performer, up 3.3% to 213p.
Berendsen has produced solid numbers this morning, in line with the reduced expectations set in the late summer. The news this morning will not put the stock back at its previous valuation, in our view. Revenue rose last year by 2% on an underlying basis and operating profit fell by 4%; the adjusted operating margin fell from 15.1% to 14.5%. The weaker performance versus prior year was expected but today we are told that 2017 will be a year of transition that the UK issues are still to be resolved, management talk of the good stuff coming in the medium term and the results for this year will be more 2H weighted than usual. Amidst this sea of red flags indicating danger that such statements create there is a good business. But we shall not see it performing at full capabilities until 2018 at the earliest. It may that the large number of improvement programmes mentioned in the release today and the £450m capital investment to be made over the next three years yield improvements and growth. The refreshed top team has a lengthy of tasks ahead. More below.
Carillion bounced a little yesterday and was the best performer, up 3.3% to 213p. At this stage it may be that demand was strengthened by short closing and the numbers of shares traded was high at 9.5m. Our view on Carillion is known but the move yesterday is probably a technical one rather than fundamental; generating sustained support for the share price will take some time.
Capita, down 9.1% at 514p and Travis Perkins, down 6.2% at 1468p were the back markers and at one stage TPK was down near 10%. Both stocks have recently lost FTSE100 status, a shift which creates its own momentum in share trading. We attended both meetings, the first by webcast and the second in person. The capita meeting was unsatisfactory as there is clearly much more to come out in terms of the way management has used accounting rules to flatter performance; the recent £90m write off included £40m of income due at some point in the future but was intended to be included in 2016. For example, in yesterday’s discussion the issue of the company factoring invoices was mentioned but the depth of the use of that was not stated; invoice factoring is virtually impossible for outsiders to detect but has been used extensively to flatter cash. It is therefore hugely ironic that its new Chairman is the former Chairman of Accountants PWC, one of the companies that has been heavily involved with taking fees from companies whose accounts have later been shown to perhaps be not quite true and fair; something for which shareholders have paid a high price. Perhaps by being at the sharper end he will now see how investors have been treated.
The presentation from the top team at Capita, as with Interserve earlier in the week, was difficult for everyone as it was led by a CEO who will not be there within the next 12 months, probably earlier and who is falling on his sword due to weak performance. Other members of the top team, especially the FD have to calculate that the odds are they will be seeing head-hunters pretty soon as well. Let them go as SIG, G4S and Serco did recently. Interim appointments make more sense, in our view because at least then preparations can be made for the new leader doing the inevitable strategy and organisational review etc. Instead, as we saw yesterday, the presentation is about how good the existing business really is, how wonderful it will be in the mid-term and how some of the bad stuff will not be repeated. From a shareholder perspective the hiatus is too long and time is wasted.
The strategic problems at Capita are unresolved. It is engaging in using more technology to boost its ability to win work though in most cases it is not its own and rivals can use it as well. It is still operating in emotive fee collection activity such as car parking in hospitals, the TV licence and congestion charging in which its reputation for being ruthless is not aiding its image. The guy taking the decision to buy a major IT programme or Capita shares may have been fined £100 for parking longer than 20 minutes in a hospital car park recently!!! There probably is a role for the company in the UK in BPO using standard technologies available to all but it may not be at 10% margins. That is what the new CEO has to work out and the process has not really started.
Travis Perkins provided a strong presentation of progress. There is a lot going on in the company as selling planks of wood and paving stones is a lot more complicated now than it was. Our experience at the Hersham branch showed that staff are struggling to cope. The environment in which it operates now has changed a bit from what was expected when the strategy was set. The fast pace of the increased use of on-line, Brexit affecting both demand and input costs, Bunnings buying Homebase and the greater level of price transparency were lesser concerns over three years ago when the strategy was set. The prospect of a hit to costs from the substantial rise in business rates is new and was not mentioned yesterday. We expect that TPK will succeed but expectations with the business are a tad lower than they were. The Plumbing and Heating area continues to give problems and has done so for some two years; so the news yesterday that Tony Buffin, the COO, is to roll up his sleeves and get the operation back on track is helpful. The answers from the mainstream Merchants to the challenge set by on-line “disrupters” has not quite been met so far. Yesterday’s presentation showed that the experience and customer understanding of CEO John Carter is essential; the COO has been with the business for just four years and the FD is new. Merchants have usually been led by operators not accountants.
Berendsen’s promise of a better tomorrow detracts perhaps from it being a good operation now; it’s just not as good as we thought when it was on a p/e of 20x. We are surprised a little that there is so much going on in terms of Strategy Reviews; Business Excellence programmes (Berendsen Excellence); new operating models; increased training, monitoring and formalised development structures; reporting line restructures; new customer relationship management tools (Berendsen Advance); increased capital spend and a new capex and bids committee. That is a lot of change in a business that was doing pretty well in its patch already! With 53.3p of EPS last year and an expectation before today that it would reach 63p this year the price at close was up with events at 929p. But the red flags today suggest that last night’s close may be optimistic.
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