Market Commentary - Housing, Infrastructure, Construction and Services 5th April 2017
HSS Hire has reported its full year numbers for the year to end December 2016 and as expected they do not make great reading but might have been worse. HSS is rebooting itself to stand a better chance of success.
HSS Hire has reported its full year numbers for the year to end December 2016 and as expected they do not make great reading but might have been worse. The original plan at float has been abandoned in favour of a modest expansion but the legacy costs of the depots leased to create the fast growth will remain a burden for some time. Revenue grew last year by 9.6% to £342m but it’s not clear to us whether that is L4L structure or not and adjusted EBITA was up just 1% at £20.5m. 2016 was a 53 week year compared with 52 in 2015. Mainstream rental revenue was flat at £263m and its contribution (revenue less COGS) fell to £179m from £182m in the prior year. Logically therefore all of the growth arose from services activity, the only other segment, services were revenue rose 61% and the contribution increased by 69%. The company provides lots of statement about how it will improve in the future and the business buzzword generator is in overdrive with references to right-sizing, industrialised engineering function alongside retail like logistics, paradigm shifts, superior fleet availability and delivering operational innovation to hire. If all that means is that it expects to improve its financial performance then investors should be relieved. They should certainly be pleased to see that investment is now in better control and that net debt was up by only £1m to £219m after the late 2016 equity fundraise of £13m; average net debt must be pushing the company near its limit of £250m. But not paying a final dividend this year is unhelpful for sentiment and preclude some investors from holding the stock. More below on HSS.
The important industry thought about the release today from HSS is that the market for hire and in construction remain robust, as far as they can experience. The company states that the advisory Referendum created little or no impact though revenue from customers serving RMI markets was below initial expectations. The read across so far remains positive.
Investors reading reports of a fall in the PMI for construction and about delays on big infrastructure, such as nuclear, might be thinking that it’s time to become cautious about the sector. Among the larger companies that we cover our sense is that there is plenty of work but delays are rising. The investment expected to counter any Brexit inspired falls in activity has not started and the housing shortage has not gone away, though financial services jobs are leaving London which will ease some pressure. So there remain plenty of reasons to be cheerful.
Berendsen regained some strength yesterday with a 3.8% rise to 769p; as we have said before the selling was rather harsh but there are limited arguments, as yet, for it to get back to former high valuations of near 20x p/e. But the current 13x p/e is low. Interestingly Rentokil closed up 1.7% at 250.6p, the first time it has been at that level since August 2002. Regular readers will know we have been positive for many reasons mainly due to strategy and its clean and efficient implementation but also the valuation gap with its main US peer Rollins, which trades on a prospective p/e of 38x. RTO has a consensus for 11.8p of EPS this year and 10% earnings growth in 2018, so it’s easy to see how it is getting support on that basis.
Carillion was the main loser yesterday, down 2.3% at 219.5p after unfavourable broker comments and a lowering of target prices. What is there to say that can add to what has been said? Operationally the business appears to be in better shape than most rivals but the Eaga acquisition (£400m wasted) and the subsequent financial strategy have left it with a weak balance sheet. It will take some time to unravel and we suspect it will do so successfully but it’s a hard grind for the management. Addressing the pension deficit payment and finding a solution to the convertible due in 2019 will not be easy; there are cures for the former that have not been tried yet and a longevity swap is not one of them.
HSS is rebooting itself to stand a better chance of success. The operational improvements it is seeking and the cost reduction programme should help to improve the situation. It talks of increased revenue from key accounts as well as in services, though the key ones include Amey which is as troubled as HSS at present. All of the right intentions exist but the hub and spoke model with large distribution centres creating more efficient utilisation, in theory, has yet to be proven. So far all we can see is the 8% rise in Administration costs to £156m, which while lower than the sales value increase does not suggest that there are meaningful cost savings dropping through and distribution costs rose 9% as a result of increased use of the transport fleet. HSS remains therefore in transition, a far cry from the float prospectus. With EBITDA last year of £58m and an EV of £333m at last night’s closing price HSS looks fully valued on historic earnings.
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