Market Commentary - Housing, Infrastructure, Construction and Services 7th February 2017
Speedy Hire, Entu and Bellway have issued trading updates today, St Modwen has issued finals and Rentokil has told us of its most recent acquisition and indicates that it did 41 transactions in 2016, mostly bolt-ons, with £124m of annualised revenue. G4S was the main riser, up 1.3% yesterday to 255p. The company is getting tad more support right now from buy and sell side and we suspect that target prices of at least 300p will become the norm quite soon.
Speedy Hire, Entu and Bellway have issued trading updates today, St Modwen has issued finals and Rentokil has told us of its most recent acquisition and indicates that it did 41 transactions in 2016, mostly bolt-ons, with £124m of annualised revenue. Speedy informs us that adjusted PBT will be ahead of previous expectations as revenue is 10.6% higher L4L in Q3 of its financial year and other efficiencies are kicking in. Entu has announced that it has focussed the operations on a smaller number of activities and cleaned up its accounting, especially around revenue recognition and is in much better shape. Bellway has followed the usual pattern with housebuilders in recent weeks with a 4% rise in ASP in the first six months of its year to January 2017 and a 7% rise in volume to 4,462 homes. St Modwen ‘s numbers show a 3% rise in NAV and the company was clearly affected by a slight wobble in 2016 blamed on macro-economic factors. It is clearly feeling a cold draught on some of its schemes at present which the Housing White Paper will not help, we suspect. Rentokil has been quietly getting on with building its presence in pest control in the US while attention might have been turned, in the mainstream public arena, to its deal in services with Haniel. It paid £107m to buy the 41 companies last year, 35 of which were and still are in pest control and 17 of which are in North America. The latest purchase, Allgood Services of Georgia is a little larger than most recent buys with $26m of revenue in the 12 months prior to takeover. More Below on Speedy, Bellway and Rentokil.
G4S was the main riser, up 1.3% yesterday to 255p. The company is getting tad more support right now from buy and sell side and we suspect that target prices of at least 300p will become the norm quite soon. A quick glance at the news tells us that security is a growth business so the largest non-military organisations in the world operating in that field might just stand a chance of doing well if it gets it operations in good order, which has been the case in the last four years. Polypipe was the largest loser, down 1.5% as it retraced recent improvements to which we attaché little importance; it was just the pattern of trading on the day. Interestingly Compass fell 1% to 1429p, adding little to demand for its own stock with a buy back of just 10,000 of its shares yesterday, amidst the 2.6m total volume of shares traded. We suspect that CPG needs to revive the story a little and for some time we have indicated that buy-backs are not the best value for shareholders. We would like to hear more about the exciting and significant structural growth opportunities referred to last week in the update.
Speedy’s revival has not taken long, with hindsight and the indication today that PBT for 16/17 (year end March) is likely to be higher than the £13m currently pencilled in by the market comes as no great surprise to us. A big uplift was expected next year in any event with a short £19m as the number so it was always possible that good news could come a bit early. The switch towards higher added value hire products and services as well a framework deals with major users is a solid approach to hire operations, in our view, in an era when simple tools ad equipment are throw away items for jobbing builders. We are making it sound easy and we are sure that is not the case. Under relatively new CEO Russell Down it was a case of taking the best parts of the actions of his two predecessors (Steve Corcoran and Mark Rogerson) and making them make much more sense to employees and customers as well as adding a few other new ideas. The company highlights today its improved outcomes in cost, customer service and the retention of major accounts, such as Carillion’s which is worth up to £45m over the next three years. There has been no recent talk of getting together with HSS and we suspect that will fade as the two businesses are diverging and while both are in hire their approach is quite different. The share closed at 50p last night which with around £90m of net debt (possibly less) and £266m of market cap is an EV of £355m ‘ish. Forecasts point to an EBITDA of around £70m whch is an EV/EBITDA of 5.2x. With net debt falling and earnings set to improve next year again the shares look to be too low at present.
The housebuilders reacted negatively yesterday to the chatter around the Housing White Paper which is expected to come out today. The market’s attention is more focussed on the larger stocks, especially Persimmon. It is picked out as unlike some rivals it has not moved up market in ASP terms as it has grown while most other rivals have. Bellway’s numbers today show some of the upmarket drift but more importantly suggest that the recent dash for growth has not harmed operating margins which were 22% in the six month period and the company has reinvested in land spending £380m on 6,287 plots in the period. The level of net debt at £175m (up from £59m at this time last year) will be seen as negative for valuation but the company expects it to be lower at the year end. The data today almost makes the results themselves irrelevant as there is enough data here to create an accurate picture. Bellway’s fortunes in share price terms are guided by the macro issues; it is not the most attractive of the housebuilders in our view due to its financial exposure and lower than average dividend return. By the time Bellway reaches its chosen cruise altitude in terms of volumes the market may have drifted a little which will mean less cash available for shareholders than some rivals can offer.
Rentokil has been transformed under Andy Ransom by some very simple and effective strategies and a process of implementing them swiftly and well. The global pest control market is worth £78bn a year and the USA is half of that so what has the company done, bought a much bigger presence in the US in the core pest control operations. It begs the question of why the company struggled for so long with perennial underperformers such as Citylink and IFS but it did. The important next stage is leveraging from that US position into growth elsewhere in the world where legislation on pest control and hygiene standards are rising. Growth in the US has some way to go as well, organically and via more deals, we believe. So the 230p price at close last night looks low on a long term view and that probably does not factor in fully the improvements that might arise from the Haniel deal.
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