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Stephen Rawlinson
5 June 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 5th June 2017

Telford Homes provides the news today with an announcement that it has signed a development agreement with US build to rent specialist Greystar to deliver 894 new homes on two sites at Nine Elms. There is some new news planned for this week with Fulcrum Utility Services having finals on Tuesday and Morgan Sindall has a site visit. On Wednesday Mears has its AGM and Halifax Building Society is due to release its monthly price index; St Modwen is also due to make an update on election day and on Friday there is no planned news.

Telford Homes provides the news today with an announcement that it has signed a development agreement with US build to rent specialist Greystar to deliver 894 new homes on two sites at Nine Elms. The land has been acquired from the Royal Mail by Greystar. For Telford the deal has substantial advantages not the least of which being staged payments such that its own working capital input is limited and it is taking no sales or rental risk. Our sense is that completion is a long way off as the project is still in development and there is still a great deal of unsold property in that area at present and many dwellings near completion now, which will tell us something about the likely success of the area. The other significant element is that Telford tell us that the operating margins on the project will be typical of its target for build to rent; we believe that is usually in the 5-8% range which given that it has construction risk only is relatively high. Several companies have pushed hard to get work in building homes for rent (whether for PRS, Housing Associations or Local Authorities) as the margins are currently attractive (Kier, Galliford Try, Morgan Sindall). 

There is some new news planned for this week with Fulcrum Utility Services having finals on Tuesday and Morgan Sindall has a site visit. On Wednesday Mears has its AGM and Halifax Building Society is due to release its monthly price index; St Modwen is also due to make an update on election day and on Friday there is no planned news.

On Friday last there was little movement among sector stocks. In our universe Homeserve rose 1.3% to 756p and was the best riser and the worse faller was Grafton, down just 2.1% to 778p following a good run in recent months. The winners and losers were equally balanced in our 22 stocks and the sector indices finished level. Investors are sitting on their hands it would seem despite concerns about the economic situation. The data is mixed though clearly growth is slowing and in construction skills shortages seem likely to worsen. Arguably demand remains positive and order books are full so companies remain positive and why not!

Moves last week

The FTSE100 index closed Friday last week on exactly the same number as a week earlier. In the sector there was limited movement with a slight bias to a small increase. The housebuilders fell slightly and seem resilient at present to news of monthly dips in prices and slowing annual rates of price rises. Shortage of stock on the market, save in some parts of London is sustaining optimism.

The best riser last week was Capita, up 3.9% to 591p. Optically the stock remains cheap given the market forecast of 55-60p of EPS this year and a return to growth in 2018. But as long as the CEO role remains uncertain the price will be restrained. There seems to be a growing consensus that an equity fundraising will not be needed though we should not rule out further accounting adjustments, many of which will be non-cash.

The two main losers last week were down for very different reasons. Interserve fell by 3.1% to 224p as it struggles to get any support and it has had an interim CEO for too long. In our view that situation has been an unreasonable environment in which to operate for all concerned (customers, the departing CEO and staff) and has made it even more difficult that it might have been for new CEO Debbie White, when she starts in September. MGNS fell by 3.3% and was the largest loser after its very strong run post the results; despite the dip last week it is up 64% YTD so some adjustment is to be expected. The base case is that EPS might reached the 150-160p level by 2020, possibly earlier and at 1233p at close the stock is not overly expensive. The fact that the value in the business went undetected for so long suggests the company needs to broadcast the story a bit harder as it is unchanged since the middle of last year. As with any stocks were there is limited volumes in the MiFiDII environment they will struggle to get “air time” and that seems to have happened to MGNS even prior to the forthcoming changes in the way research is paid for (or not!).

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