Market Commentary - Housing, Infrastructure, Construction and Services 7th March 2017
Grafton and Ibstock delivered full year numbers for 2016 today and Ashtead its Q3 and YTD progress. Ashtead shows us progress with Q3 and YTD rises in revenue of 13% and operating profit of 9%; the UK operations showed positive growth in revenue at 14% which is a positive read across to Speedy and others though EBITDA margins are down a tad at 36.6% from 37.5%. Lakehouse has decided that enough is enough on the main market and it is flipping to AiM. And McCarthy and Stone has issued an update in which it tells us that trading has remained stable having previously indicated that order books in its segment of the market were a constraint on growth. Its guidance is that full year expectations are unchanged.
Grafton and Ibstock delivered full year numbers for 2016 today and Ashtead its Q3 and YTD progress. Ashtead shows us progress with Q3 and YTD rises in revenue of 13% and operating profit of 9%; the UK operations showed positive growth in revenue at 14% which is a positive read across to Speedy and others though EBITDA margins are down a tad at 36.6% from 37.5%. Lakehouse has decided that enough is enough on the main market and it is flipping to AIM. McCarthy and Stone has issued an update in which it tells us that trading has remained stable having previously indicated that order books in its segment of the market were a constraint on growth. Its guidance is that full year expectations are unchanged.
Grafton increased revenue by 10% last year at CER “broadly” split between organic growth and acquisition; we suspect broadly means evenly. The revenue at AER was £2.5bn, a 13% increase and operating profit rose by 12% to £142m. Net debt reduced by £17.3m to £96m and the dividend was increased by 10% to 13.8p. The main headlines show that the company ended the year well in the UK, despite the post Referendum wobbles that affected all companies and in Ireland conditions were strong all year. The Selco proposition was successful again last year and the proposal is to further expand it in 2017; the model requires relatively high levels of stock but the attraction to customers of availability of materials and transparent pricing in big sheds in busy places is working. The company tell us that the UK restructuring is now completed. The concern this morning, if there is any will be around the decline in profitability in UK Merchanting where L4L revenue rose by 2.9% for the year and in headline terms it rose 6.6% to £1.7bn and operating profit fell by £6m to £100, margins were 5.6% versus 6.4% last year. The issues in that segment were expected and tough conditions in Plumbing and heating markets were the primary issue and 28 branches were closed; the channels to market have altered in the segment and the mainstream operators have struggled to adjust. The shares closed last night at 607p and with EPS at and expected to be 43p this year after 39.6p last year the shares are arguably up with events. The boost from trading in Ireland is good but not enough to offset some of the tough UK market issues.
Ibstock, the UK’s largest brick maker, ended 2016 with a 5.3% rise in revenue to £435m and a 4.3% rise in EBITDA to £112m, on a pro forma basis. EPS at 18.1p for the year just ended compares with a price at close last night of 202p. The story from Ibstock about it markets is familiar from trading updates and rivals, which is that market conditions improved in 2H as the supply chain destocked and house building volumes were sustained despite the uncertainties of Brexit. The plans to invest in new capacity in Leicestershire, 100m bricks pa, is proceeding and will be on stream in 2H2017. The expected level of housebuilding, FX making imports unattractive and the enduring preference for brick as the facing material should mean the capacity is absorbed. The company has other improvement projects that should help its progress in 2017. The final dividend of 5.3p was declared making the total 7.7p for the full year. Nervousness about the housing market is holding back the valuation at Ibstock, we believe and all of the signs suggest that volumes in the mid-term are likely to rise. Trading YTD has been ahead of last year. The net debt has fallen to 1.2x EBITDA so that is not a constraint on value, in our view.
Barratt did something interesting yesterday. It announced the sale of 172 homes in Central London for £141m to Henderson Park and Greystar, both of which are PRS operators. It may be that the market for two bed apartments in sub prime locations at £800,000 each is just not there right now and it has good uses of the cash elsewhere. The main part of the sale was Barratt’s 118 unit tower at Nine Elms which we pass each day and ponder when the stuff will hit the fan on that whole project. We count 14 tall units currently under construction going past them each day into Waterloo. Progress is glacial on the sites, despite global warming! Barratt arguably is just recycling its capital effectively but the temptation to read in to their action a 12-18 month dip in activity in London, extendable depending on Brexit, is hard to resist.
In some five years since we started this Commentary yesterday was probably the one with the least to talk about. G4S was the leader, rising 1.2% to 268p; it has results on Wednesday this week and we reckon that CEO Ashley Almanza will have some pretty good news triggered by positive trading and boosted by FX, at the headline level. The shifts in the price lately are in line with what we have been saying on the stock. Just do not get too carried away when the numbers appear. 300p is the best short term target we suspect though long term there is still much to go for and large corporate moves should not be ruled out. But this time any discussion will be from a position of strength at G4S.
Mears was the back market down 1.8% but with just 24,220 shares traded the move is not representative. Serco was the other weakest performer, down 1.4% on 10.4m shares traded to 112.4p; again there is not much to be read into that move. The market got a tad over exuberant on the shares and is adjusting a little. Serco is a good company and it getting better. But in EPS terms, or by any other well used valuation measure, it is likely to be 2018 at the earliest when the real impact of the work to regenerate the business done over the last two years shows through fully. The markers along the way, that could cause enthusiasm to return, include is winning one or more of the six “elephant” projects for which it is currently bidding and/or a return to the dividend list and/or early and good resolution of one or more of the larger Onerous Contract provisions (OCPs). On a three year view 112p could be quite cheap.
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