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Stephen Rawlinson
8 June 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 8th June 2017

The proposed offer by Elis for Berendsen has been increased to the equivalent of 1250p (plus 11p of dividend), from 1180p and at 6.35pm yesterday it was announced that it is now recommended by the acquiree’s board. Two macro pieces of news are worth considering. The Halifax Building Society yesterday indicated that house prices are growing at the slowest rate for four years at 3.3%, which is believable and consistent with other monitors of house prices. The OECD stated the UK needs to take steps to counteract the adverse impact of Brexit and slowing real growth in real household incomes; the recommended steps included more borrowing.

The proposed offer by Elis for Berendsen has been increased to the equivalent of 1250p (plus 11p of dividend), from 1180p and at 6.35pm yesterday it was announced that it is now recommended by the acquiree’s board. It’s hard to see how a new bid could emerge at that level as there are few if any other parties who can apply the same synergies as Elis to a combination with Berendsen. The proposed offer is a combination of 540p in cash and the remainder in Elis shares. There may be some frustration at Berendsen that a bid in excess of the share price peak of 1337p, reached in mid-2016, is not on the table but since that time two substantial profit warnings have exposed the company. At least the new offer is ahead of the 1200p level the price was at the day the appointment of current CEO James Drummond was announced; little things like that mean a lot! Our sense is that Berendsen holders will take a sanguine view based on the new proposal being well ahead of the undisturbed price of 864p and recycle the cash; if it is reapplied to the sector G4S, Rentokil and Compass are the natural “homes” with similar risk/reward to Berendsen. Mitie, though it has different geographic exposure to the others may also benefit from the recycling and maybe all four stocks have had a boost already.

There is little other news on Election Day 2017. Mears AGM yesterday occurred without a trading update release, just two replacement NEDs were appointed and Compass had a general meeting at which the £1bn special dividend was approved with a 99.99% vote!

Two macro pieces of news are worth considering. The Halifax Building Society yesterday indicated that house prices are growing at the slowest rate for four years at 3.3%, which is believable and consistent with other monitors of house prices. Tthe OECD stated the UK needs to take steps to counteract the adverse impact of Brexit and slowing real growth in real household incomes; the recommended steps included more borrowing. The disjoint between the macro data and the cautious optimism in company statements about market demand is becoming a tad more obvious. The only real concerns we hear about from companies those of are estate agents who have few second hand dwellings to sell and some sectors that fear a shortage of cheap low skilled labour. We are heading for a slower growth according to the macro data but it’s too early to know how deep that will go. It is also not clear yet whether it is cyclical or the early stages of a structural change triggered by the politician’s determination to exit the EU.

For several days now we have been saying that the sector is stuck in election doldrums and that remained the case yesterday. Travis Perkins was the best riser, up 1.5% to 158p and Capita was the worst performer, down 2.1% to 541p. Such moves are arguably in the ebb and flow of trading on the day. But it also has to be said that in Capita’s case the just is still out and the lack of consistent support indicates that the absence of a new CEO and concerns about an equity fund raise and, in the age of robotic automation of back offices, what Capita’s offer might be in the future. With near 60p of EPS due this year Capita looks cheap, unless the issues are much deeper than even we fear.

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