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Stephen Rawlinson
7 June 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 7th June 2017

Galliford Try, Workspace and St Modwen have news this morning. Yesterday we attended Morgan Sindall’s Capital Markets Day. The upwards moves yesterday were unconvincing, befitting the uncertainty we know exists

Galliford Try, Workspace and St Modwen have news this morning. GFRD has replaced a NED with former Serco FD Andrew Jenner leaving and Jeremy Townsend, FD at Rentokil, taking his place from 1st September. Workspace released its final results today and St Modwen has a trading update to accompany a CMD. We have looked at the releases of both companies largely for read across. Both state similar sentiments around demand being good despite present uncertainties. St Modwen has issued new targets that include growing its commercial activities and its residential and housebuilding operations. So no evidence of any real slowdown though market comments signal caution

Yesterday we attended Morgan Sindall’s Capital Markets Day. The company has been saying for some 12 months now that things are looking up and it continued with that theme yesterday, adding that it now has real momentum. The topic yesterday was the Regeneration side of the company which comprises Partnership Housing and Urban Regeneration. We had presentations followed by a visit to Woolwich to see a live site. The core financial message is that the £190m of capital employed in the operations is targeted to expand to £400m (£250m Partnership housing/£150m Urban regeneration) and the rate of return should rise from 13-14% blended at present to 20% or more in the mid term. The precise split of capital allocation between the two will depend on the projects as they roll forward, existing and new. This will provide the main earnings growth engine for the group as in Construction and Infrastructure the objective is to raise margins and in Fit-Out the view is that both revenue and margin are good now can be sustained. The increased capital allocation and level of return will be boosted by customers and land sellers moving to staged payments profiles thereby boosting the return for MGNS

The site at Woolwich was impressive. We saw a 120 dwelling unit for private sale and examined that and observed a 120 dwelling social init that is in construction. The 1 and 2 bed units for private sale are findng no shortage of demand at 500-550 per sq ft. The location is close to Woolwich station which has good links and is on Crossrail. The site has poor lorry access but that is solved by having intermediate logistics points. From our questions there have been few issues in getting labour and at one stage there were 450 operatives on site. The key issue to date has been supply of heavy materials, bricks and blocks the UK capacity for which is near full stretch and in the case of lightweight blocks there are raw material issues. Good news for Forterra and Ibstock!

We have been banging the drum hard about the good things happening at MGNS for over a year. There will be increasing evidence of success in our view. The net cash position at present, the level of demand and the low risk approaches to contracts point to sustainability. It does build things so there will be good and bad projects but the four legacy projects that caused the warnings some five years ago are now long since settled. Risk is managed very differently today. So with earnings heading for 160p a share by 2020, in our view, MGNS is still in growth mode at 1251p. Realistically, over the next year, targets might start to hit 1800p, depending on the rate of progress.

The upwards moves yesterday were unconvincing; befitting the uncertainty we know exists. Serco and Mitie were joint leaders both rising 0.99% the former to 117.44 and the latter to 244.4p. Clearly companies providing services on long term contracts should be in greater demand in uncertain times and that is holding true. Mitie report sit 2016/17 numbers Monday next and provides a brief on the Bentley Strategy for the business. We have had some glimpses already with mentions of the “Connected Workspace” as a competitive approach but this time we expect some performance targets as well.

The downwards moves were more decisive with Capita falling 5.6% to 544p giving back recent gains and companies with a construction bias falling sharply, Carillion was down 4.5% to close below 200p at 192p, its lowest close since March 2004; Balfour Beatty was down 3.0% to 269p, Kier down 2.5% to 1183p and Galliford Try down 2.4% to 1160p. There is very limited support for these stocks at present as the promises of an infrastructure boom fade and in some cases Middle East exposure, especially Qatar, weighs on expected earnings forecasts. In the construction company examples valuations are low and seem to ignore reliable earnings streams from other activities. We suspect though that investors will wait until the election outcome is known as the risk is binary at present and there is no need to rush. Valuations are so low there will be time to get on board if the UK infrastructure boom happens.

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