Market Commentary - Housing, Infrastructure, Construction and Services 8th March 2017
G4S, Breedon and Tyman provide news this morning. G4S has produced excellent numbers with revenue at CER up 6% and PBITA by 10% at CER. The management is signalling that after four tough years it has turned the business around and is now on a growth path with an organisation that has strong foundations. Breedon’s march to glory continues with a 43% rise in revenue to £455m and a 58% rise in EBIT to £60m. Tyman ‘s revenue rose by 1% L4L last year and the underlying operating profit increased by 5%.
G4S, Breedon and Tyman provide news this morning. G4S has produced excellent numbers with revenue at CER up 6% and PBITA by 10% at CER. The management is signalling that after four tough years it has turned the business around and is now on a growth path with an organisation that has strong foundations. The statement is bold and intentionally so, from our interpretation. The reduction in net debt has been achieved and it was £112m lower at £1.7bn and but for FX would have been £222m lower; it is now 2.8x EBITDA and is heading for less than 2.5x by the end of this year, as promised in 2016.
Breedon’s march to glory continues with a 43% rise in revenue to £455m and a 58% rise in EBIT to £60m. The big event in 2016 was the completion of the acquisition of Hope Construction materials which took the company into cement manufacture as well as extending its geographic and product scope. That substantial deal did not stop progress in the “ordinary” operations or with bolt-ons, the company acquired Sherburn in November, a 110 employee operation in the North East. The big picture in terms of demand looks favourable for Breedon, a company statement today attests, with housebuilding sustained at an increased level and the promise of more and the infrastructure programme moving ahead with product intensive projects in rail, roads and water moving forward.
Tyman ‘s revenue rose by 1% L4L last year and the underlying operating profit increased by 5%. The headline numbers at AER show revenue of £458m and underlying operating profit of £70m. 2016 was a tough year with three substantial acquisitions and the outcome of the Referendum to handle. The good news evident this morning is that the challenges seem to have been met and importantly 2017 has started well. The latter point is shared by others in the building sector so is the “norm” as market have remained strong and the weather mild, but the company still has to perform! There is a hint of caution in the statement insofar as the company points to the need to manage input costs this year, where it arises and clearly the ability to pass through such costs in the UK in particular will be crucial. More below
The market liked Grafton’s numbers a little more than we expected shown by the stock rising the best of our universe, up 8.2% to 656p. The numbers for 2016 were slightly ahead but with trading YTD positive and no adverse shocks of any kind, unlike the results from Travis last week the market became enthusiastic about Grafton. Its Selco format has not been copied effectively. It seems to be more down to earth in its approach than some rivals and exposure to the Netherlands and Ireland provide some important growth opportunities.
Mitie fell 5.6% yesterday to 198p on unfavourable broker comment. It’s inevitable that the new top team will make a large provision so investors have to be realistic about short term moves. They will want to do it once and will not yet properly know all of the skeletons in the cupboard; they will have a very good idea but will err on the side of large than needed. Our sense is that Mitie will become a £2bn a year revenue business with margins and annual growth of 5%, in which case 18-20p of EPS will be the right level to think about as a target, but that will not happen convincingly until 2019, we believe.
We did not mention Interserve’s new CEO announced yesterday because we needed to do some homework. Debbie White takes over in the Autumn departing her global role at Sodexo as CEO of Government and Health. It’s easy to see the attractions of the IRV role with a lower level of travelling and the company being at or near a low point, certainly in share price terms. At Sodexo the next step up would have been group CEO which is a tough ask. There is no doubt that she has relevant FM experience but will possibly find the going tough in construction and in cracking the City and its ways. On the former is arguable that managing a services business is very different from managing a construction business and that may have been a relevant factor for the outgoing IRV CEO who came from a services background. We shall need to watch who she recruits in the area or who she appoints to sell it! In the meantime there is the very difficult task of unravelling the Energy from waste operations, one that could occupy some of the best minds in contracting for a long time. The 3.1% fall in the share price yesterday, to 232p as possibly harsh but the appointment shows how tough it is to get somebody who ticks all of the boxes in terms of experience.
The detail of growth by segment and geography is important at G4S but in a short morning note there is a great deal to digest before saying something sensible. The key point this morning is that the transformation stage is being signalled as completed and the growth phase of earnings and revenue has begun. The operating margin at group level last year was 6.7% and we shall attend the meeting today to get a view on where the margin may trend in the future as across each of the parts of the business performance is variable in that regard. The full year dividend is maintained at 9.4p based on EPS of 15.9p which is slightly ahead of expectations and with 18.5p expected this year the shares may just continue the good recent run, closing last night at 267p, up 14% YTD, so far.
Breedon’s share price usually reflects its excellent habit of beating expectations and the ownership of assets that cannot be replicated easily, if at all. It closed at 77p last night which is a good rating based on EPS of 3.5p last year. Net debt at the year end was £160m after the acquisition of hope; we expect to see it fall given the cash generation capacity of the business but not at the expense of growth. If the markets for its products expand as expected there is every reason for the company to see further growth and we suspect that forecast will nude ahead today based on the numbers and messages in the statement.
Tyman’s share price has hovered between 250 and 290p for the last 18 months. This morning’s news will help to keep it at the top end of the range, which at 280p at close last night it has achieved. Underlying EPS was 25.4p last year, easily ahead of consensus forecasts; perhaps not all contributors adjusted fully for FX moves which are considerable for Tyman. The messages from Tyman are that the US will be a tad better this year; Euroland will see some recovery and the UK will be variable. The company is one of the earliest to warn that declines in real incomes in the UK may be adverse for demand. Is it a view we share with Tyman as some of the signs are appearing already. But also remember that some of its product goes to markets that are a distress purchase; householder’s only replace windows and doors when they really have to do so, in most cases. The business is really well operated from what we can see as outsiders but progress in 2017 depends not just on the very experienced top team but macro factors outside its control.
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