Event in Progress:
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday 12 May 2022. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 31-page note
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Mortgage rates double, but remain cheap on historic basis The cheapest two- and five-year fixed-rate mortgage deals have roughly doubled in the past three months, as lenders have relflected higher base rates, which should slow the rate of house price growth. However, longer-term fixed deals still remain extremely cheap, at 2.23% for a 10-year fixed rate, and mortgages remain affordable relative to history, while wage growth should also result in increased mortgage capacity. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 41-page note
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Travis Perkins has announced a strong start to FY22. Q1FY22 sales surged by 13.6% yoy, led by strong demand in the merchanting business (+17.9% yoy). While we acknowledge the headwinds like economic uncertainty, inflation and manufacturing costs, Travis is relatively better placed due to the growing interest in energy efficiency projects and a healthy backlog in social and economic infrastructure work. We maintain our positive stance on the stock.
Travis Perkins plc
Sector relative overweight position at risk near-term Housing renovation names with an ESG twist have juiced up the lightside sector''s performance throughout the pandemic years. Investors have flocked into the sector and built considerable overweight positions relative to their respective indexes. This could change as investors consider the sector''s exposure to emerging macroeconomic risk. Investors have already started to trim the sector''s relative overweight position but selling flows could increase further if pressure on the volume outlook becomes more acute. Positioning under a new paradigm Portfolio concentration on the back of ESG constraints has exacerbated stock-pickers'' pressure to choose from a narrower list of ESG darlings across each sector. In the lightside universe, Sika, Saint-Gobain, Kingspan, Rockwool and Geberit form part of these ''happy few''. They are the most consensual names and likely to see some selling pressure as PMs de-risk away from the sector into defensives. However, discussions with investors suggest most still want to stick with the most counter-cyclical names, with Sika seen as the most defensive. Saint-Gobain is also well liked to play the value rotation, with a business model that is delivering higher returns and is becoming less cyclical. What are clients avoiding? Rising mortgage rates, housing affordability issues and increased macroeconomic risks have left EU and US housing exposed names (Wienerberger, Owens Corning) looking more vulnerable to a global sell-off. We are also starting to sense some nervousness around non-energy-saving renovation exposed names such as Travis Perkins, Ferguson and Trex. Where are clients seeking refuge in this uncertain macro environment? Investors are moving back towards defensive quality names including Rockwool post the sell-off, as well as Sika, which could benefit the most from normalising inflationary pressures in 2023.
TPK SGO WIE WIE SIKA FERG GEBN KSP ROCKB ROCKB AWI AWI TREX TREX OC OC IBST FORT
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday 28 April 2022. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 31-page note
Today's news and views, plus announcements from HIK, RKT, TPK, AO., SHI, LINV, & AEXG.
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Building Materials - Trading Comment - TPK.L Travis Perkins^ (TPK.L, Sell at 1267p) Mixed bag in Q1; Toolstation 12% LfL revenue decline concerning
Initial Trading Comment - 29 April
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Screen of the Week - Magic formula industrials, Go-Ahead, Sylvania Platinum, Ferro-Alloy Resources, TruFin, Mining LOWdown, Market Highlights
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Screen of the Week - Magic formula industrials, Go-Ahead, Sylvania Platinum, Malin Corporation, Ferro-Alloy Resources, TruFin, Mining LOWdown, Market Highlights
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Strong start and pricing still a tailwind Travis Perkins has enjoyed a strong start to the year, with revenues ahead by c.14%, mainly driven by price inflation. The demand outlook remains healthy, particularly across the group’s larger customers, and the jobbing builder remains busy. The Ukraine conflict is likely to mean price inflation remains higher for longer, which should be a tailwind for margins, as the cost base remains manageable. The shares are inexpensive at 10x CY23E earnings, and with a positive backdrop, cash generation should remain excellent, giving the group optionality around shareholder returns. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com
Meeting Notes - Apr 28 2022
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Click here to see the note Key Stocks • AB Dynamics# (Buy, TP 2,800p): 1H started well (Wednesday 27 April, Interims)• Persimmon (Buy, TP 3,260p): Prices vs costs (Wednesday 27 April, AGM)• RPS (Buy, TP 138p): Strongly positioned for ESG and sustainability opportunities (Weds 27 April, 1Q update)• Breedon (Buy, PT 123p): Robust trading (Thursday 28 April, AGM)• Howden Joinery (Buy, TP 1,095p): Any cracks in RMI? (Thursday 28 April, AGM) Stocks Previewed AB Dynamics#, Breedon, City Pub Group#, Countryside Partnerships, Devro, Focusrite#, Genuit, Go-Ahead#, Grafton, Howden Joinery, Inchcape, International Consolidated Airlines Group, International Personal Finance#, IWG, Johnson Service Group, Jupiter Fund Management, Keystone Law, Learning Technologies, Lok'nStore#, Morgan Sindall, OneSavings Bank, Persimmon, RPS, SigmaRoc#, Smiths News, Stelrad, Taylor Wimpey, Travis Perkins, Virgin Money UK 15-page note #Corporate client of Peel Hunt
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Balance between supply and demand for homes easing The balance between supply of homes and demand appears to be normalising. The rate of new supply is increasing, and although demand remains high, it is growing less strongly than it was. This, combined with increased rates, should result in reduced house price inflation over the medium term. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 41-page note
Conflict in Ukraine: Energising sustainable sourcing There will be numerous long-term changes from the war. It is already obvious that reliability of energy sourcing is critical, and many countries are stepping up investment in alternative supplies to reduce/remove dependence on Russia. This is set to drive major investment in renewable sources, with a step-up in wind, nuclear and solar, as well as increased government incentives to reduce fossil fuel demand. There also needs to be renewed emphasis on existing sources and storage to ensure sufficient supply and energy security. In this note, we look across our coverage to identify the companies with exposure to these trends. Charles.Hall@peelhunt.com, Clyde.Lewis@peelhunt.com 25-page note
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25 - 29 April 2022
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Valuation, the main driver of lightside sector performance The lightside sector has returned over 450% since 2000. Impressive earnings growth has been a key driver but it''s the rerating of multiples that catapulted share prices to new record-highs. Re-rating like this is famously hard to achieve, but we deep-dive across other industries to find success stories and how they share similarities with Saint-Gobain, Wienerberger, Travis Perkins and Owens-Corning (all + rated). Where do we stand? On a sector wide basis, the lightside now trades around the level of its 2017-21 average at c.13x EV/EBIT. This is still a 15% premium to its long-term average multiple of 11x with quality names still looking expensive relative to historical levels and value starting to look cheap. Is quality too expensive? Valuation multiples reached all-time highs in 2021 and despite the recent sell-off and derating of expensive quality names, multiples still look stretched. Sika (=), Kingspan (+) and Geberit (-) still trade above mid-cycle multiples putting them at risk of further derating. On the flip-side, Rockwool (-), AWI (+) and Ferguson (=) multiples narrowed closer to mid-cycle levels post recent derating. Or value too cheap? The value basket is trading at or below trough multiples implying a bear-case scenario is already baked into Saint-Gobain, Wienerberger and Owens-Corning multiples (all + rated). The risk-reward has never looked this attractive given all three names have made a successful strategic turnaround lately. Risk and opportunities in the sector We explore various multiple and earnings scenarios using peak, mid and trough multiples on bull, base and bear earnings scenario. The lightside value basket has never looked so attractive whilst risks remain for quality names if further derating takes place.
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday 14 April 2022. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 31-page note
Click here to see the note Key Stocks IWG (Buy, TP 353p): No surprise likely Bunzl (Add, TP 3200p): Few surprises expected GBG# (Buy, TP 1075p): Delivering against expectations Ibstock# (Buy, TP 265p): On track Stocks Previewed AB Dynamics#, Bunzl, City Pub Group#, Foxtons, GBG#, Grafton, Howden Joinery, Ibstock#, Inchcape, IWG, OneSavings Bank, Persimmon, Rentokil Initial, RPS, Taylor Wimpey, Travis Perkins 9-page note #Corporate client of Peel Hunt
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Chart Book - RMI still sees a demographic tailwind Older demographics, particularly retirees, dominate RMI spending in the UK, accounting for c.35% of total spend. They overwhelmingly own their homes (often outright) and, post pandemic, sit both equity and cash rich. Covid-related savings have accrued to older, richer demographics with fewer fixed costs, while increased house prices have naturally benefited those with limited mortgage debt. This cohort remains ready and willing to spend on RMI in our view, which should support the market into the medium term. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com, Charles.Hall@peelhunt.com, Andrew.Shepherd-Barron@peelhunt.com, Harry.Philips@peelhunt.com 36-page note
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 31 March 2022. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 31-page note
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The message from building materials companies at the conference was surprisingly reassuring. Most corporates are enjoying good underlying demand at the start of 2022 and working hard to push big price increases to mitigate surging inflation. None of the management teams have stagflation as a core scenario and companies were especially optimistic on the US outlook. Demand on track, with some structural drivers Several companies mentioned healthy order books and resilient demand, albeit a couple of names like Vulcan flagged pockets of bad weather in Q1. Infrastructure is seen as a structural driver from 2023 and lightside names were also optimistic on renovation. Companies including Saint Gobain cited the need to improve energy efficiency and security in the wake of the Ukraine crisis. An unprecedented focus on price increases All the cement majors noted strong pricing momentum and a determination to pass multiple increases this year. Management teams from aggregates and lightside industries were equally confident on pricing. Many corporates including Travis Perkins and Holcim argued that demand is relatively inelastic because building materials represent a small proportion of a project''s total cost. More MandA to come The current crisis may provide new opportunities. Holcim, CRH, Summit Materials, Saint Gobain and Martin Marietta see MandA as a central part of their strategies. Companies provided little visibility on timing, however, and everybody committed to a disciplined approach. The next few quarters are key We are only a month into the Ukraine crisis and although corporates were reassuring on the near-term it is premature to make concrete predictions for 2023. We shared our early thoughts in Lightside... from bright side to dark(er) side and Preparing for stagflation?, and will finesse as more datapoints provide visibility in coming months. Our top picks for these uncertain times are CRH and Saint Gobain. Risk-reward is appealing for...
TPK SGO WIE WIE CRH HEI SIKA VCT VCT HOLN VMC VMC CX MLM MLM EXP EXP SUM SUM
Lightside...from bright side to dark(er) side After two years of strong earnings and share price outperformance, falling consumer sentiment, higher interest rates and increased cost pressures have ambushed the sector''s growth outlook medium-term. We downgrade Sika to Neutral, and Rockwool and Trex to Underperform. Top picks are Kingspan, Saint-Gobain in Europe and AWI and OC in the US. Near-term, still looking ''light-tastic'' Solid non-residential activity, plentiful EU renovation money and a US housing boom should open the door to another year of positive earnings surprises and drive pricing power across the industry. The best is yet to come in 2022 but all eyes are on mounting risks in 2023. ...but all eyes are on 2023 u-turn risks Earnings growth will likely peak in 2022. Falling consumer sentiment, higher inflationary headwinds and mounting geopolitical risks have dented the construction outlook in 2023. First, we expect the housing sector to show signs of pressure followed by non-residential in 2024. Renovation end-markets are more defensive, benefitting from record-high stimulus programmes in Europe offsetting a darker outlook for consumer spending. Lightside derating risks are not over yet Valuation multiples have peaked in 2021 with the quality basket having de-rated by -18% since the start of the year on growing macroeconomic concerns and central banks'' tapering actions. With a high probability of rising interest rates medium term, we believe the sector''s derating may not be over just yet. We think the value basket provides better refuge near term. Seeking refuge in pricing power and renovation plays KSP''s unrivalled pricing power should continue to drive cons. upgrades on surging steel and oil prices. SGO''s renovation exposure provides a more defensive profile amid rising new-build pressures. AWI and OC should benefit from strong pricing power and supportive renovation trends.
Home construction planning approvals increase 35% YoY Planning permission approvals for home construction projects were up 35% YoY in 2021 to 254k, with December approvals up 8% on 2020 and 29% on 2019, their highest level since 2007, as UK homeowners are still renovating their properties. Planning permissions are a useful indicator of RMI demand, which by nature are larger and more complex projects. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 41-page note
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 17 March 2022. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 31-page note
Looking ahead to the 17th Basic Materials Conference 22-24 March In this guide we provide an overview of the 13 building materials companies that are participating. We suggest 10 questions on each name. We hope the event will help us answer five big questions. Question 1: how could the Russia-Ukraine crisis impact growth and profitability? Some companies have direct exposure and the spectre of stagflation looms large. How will different companies perform in a low-growth, high-cost environment? Many restructured in response to the GFC and COVID-19. It will be interesting to hear what self-help there is left. Question 2: is pricing power strong enough to pass on spiking inflation? The market seems comfortable that aggregates and some lightside names can hike prices, but will it be enough to protect margins? And what about cement, where investors appear more nervous? Companies will update us on the latest pricing trends, cost structure and hedging positions. Question 3: could stimulus boost growth? Big infrastructure spending plans have been announced around the world, including President Biden''s USD1.2tn package, and many countries also hope to incentivise higher renovation spending. We will hear what impact the companies expect stimulus to have, and when. Question 4: is more MandA on the cards? We saw several big deals in the sector last year. Could stagflation create new opportunities, or will rising rates end the party? Absent MandA, it will be useful to know capital allocation priorities. Question 5: how will different companies cut CO2 and what will it cost? We think the market is too bearish on remedies that can make a significant difference without vast capex, such as Concrete tech for the heavyside. Will companies agree? ESG isn''t all about CO2 either. Companies will have the opportunity to outline their broader sustainability strategies.
Meeting Notes - Mar 17 2022
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Further progress expected; forecasts upgraded
Travis Perkins (TPK.L) - Sell at 1270p We applaud Travis Perkins management for streamlining the group and reducing both operating and financial leverage. However, we think TP may be a shrinking format longer term. We also see risk to FY22F consensus earnings. Our intrinsic value for Travis Perkins is c.1200p and we therefore retain our SELL recommendation.
Cash buyers and Buy to Let fuel transaction recovery Total transactions increased by 40% in FY21, or 423k homes, with 40% of this increase from the Buy to Let sector and cash buyers. In our view, this most likely reflects the impact of the Stamp Duty holiday, which closed the tax gap between investors and owner occupiers, as well as the clear pick-up in demand for holiday/second homes, which saw significant house price inflation in coastal areas. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 42-page note
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 3 March 2022. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 31-page note
Travis Perkins continues to clock a strong performance, despite the fear of multiple macro level headwinds. While the merchanting segment led the pack in FY21, Toolstation also crossed to double-digit lfl growth. The banner should continue to expand its branch network and gradually improve the financial performance (ROCE). We expect continued strength in the UK’s RMI activity during FY22. Positive stance is maintained for the stock’s valuation.
SAS UK SMID Monthly, Ferro-Alloy Resources, Travis Perkins, Supermarket Income REIT, Empiric Student Property, Galliford Try, Mining LOWdown, SMID Market Highlights
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SAS All Cap Monthly, Ferro-Alloy Resources, Persimmon, Travis Perkins, Supermarket Income REIT, Empiric Student Property, Galliford Try, Mining LOWdown, Market Highlights
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Summary of FY21 results Travis Perkins'' FY21 Adj. operating profit excluding property gains reached GBP304m, in line with consensus estimates. Q421 organic growth of 25.4% came slightly below our expectations of 26.2%, as a result of slower merchanting growth towards year-end. Key news Management provided reassuring comments during the conference call with anticipation for adjusted operating profit post property gains to improve further despite GBP25m lower real-estate gains. The group expects further volume growth in 2022 against a challenging base effect, driven by supportive renovation trends, robust trends in new-housing and a recovery across the commercial end-market. Merchanting margins should remain within the 8-8.5% range in 2022. Toolstation will face a tough comparison effect in H122 as DIY trends normalise, but management is seeing very strong traction from the B2B segment, with a growing share of the wallet from its existing and larger customers. Earnings We trim our FY22 by -1% and our FY23 EPS by -3% to reflect slightly reduced buyback expectations amidst broadly flat EBIT revisions. Our net-debt estimate is also higher to reflect the higher debt profile of the company in 2021 vs our prior expectations. Rating and target price We reiterate our Outperform rating and trim our target price to GBp2,000/share from Gbp2,050/share reflecting higher debt forecasts and slightly higher share count. Investment case A successful turnaround story with attractive FCF generation and a capital return focused mind-set.
Travis Perkins’ results would ordinarily have been better received. Results beat our EPS estimate by 5% and we upgrade 2022E by 6%. We agree with Travis’ positive view on UK residential RMI given the strength of customers’ workloads and as raised appetite for home improvement will take some time yet to be satisfied. Toolstation continues to grow quickly, with a two year like-for-like of 26% in H2 and improving margins mean we increase our valuation to £1.3bn (close to 30% of the group). We see 45% upside to a conservative SOTP based target price of 2020p.
Upgrading to Buy after strong trading After a strong set of results we increase our FY22E PBT estimates by 4% and upgrade our recommendation to Buy. Travis Perkins remains well placed to benefit from continued strong demand in the RMI market, while demand is now also coming back in the Commercial and Social housing space. Given its strong balance sheet and track record of excellent cash generation we see scope for additional capital returns over the medium term, perhaps as much as £500m. The shares currently trade on just 12x CY22E PE, in our view undemanding given the supportive macro backdrop and leading positions in the market. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com 13-page note
SAS - Investing in climate change adaptation, FTSE index review, Travis Perkins, Morgan Sindall Group, FirstGroup, GetBusy, Mining LOWdown, SMID Market Highlights
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SAS - Investing in climate change adaptation, FTSE index review, Associated British Foods, Travis Perkins, Morgan Sindall Group, Uniphar, FirstGroup, GetBusy, Mining LOWdown, Market Highlights
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Small underlying beat in FY21 Travis Perkins delivered operating profits of £353m in FY21E, 19% ahead of a restated FY19. While this is 4/6% ahead of our/consensus estimates, much of the beat is coming from additional property profits, leaving the underlying performance broadly in line. The outlook statement is somewhat limited, but the group remains confident of making further progress this year. This is underpinned by the fact that share buybacks have been increased by another £70m, to £240m. Trading at just 12.4x CY22E earnings and with a 6% FCF yield, the valuation remains undemanding in our view. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com
Travis Perkins has reported EPS 5% better than we expected, although £9m of the £12m beat at PBT level came from higher than expected property profits. The main feature of results for us is that Toolstation’s UK margin was over 6%, against our 5% estimate, suggesting that profitability is improving faster than expected as the network matures. This further supports our case for an improved stock market valuation of Toolstation. We see around 40% upside on a sum of the parts basis, arguing that Toolstation is worth £1.1bn. The market also misses the point that Travis has used the pandemic to address some long standing challenges.
Meeting Notes - Feb 28 2022
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Construction output up 14% YoY Construction output has risen 14% YoY in December, with New Housing up 16% and infrastructure spending at its higher ever levels (+39% YoY). With a strong finish to the year, the outlook for 2022 is good, with a continued focus on railways (HS2), motorways and nuclear power plants. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 41-page note
Click here to see the note Key Stocks Vistry# (Buy, TP 1,420p): Trading well, but . . . (Wednesday 2 March, FY21 results) Admiral (Reduce, TP 2,720p): Setting the tone (Thursday 3 March, FY21 results) Coats# (Buy, TP 85p): Well placed to thrive (Thursday 3 March, FY21 results) Darktrace (Hold, TP 473p): More upgrades? (Thursday 3 March, 1H22 results) Essentra# (Buy, TP 495p): Focus on components (Friday 4 March, FY21 results) Stocks Previewed 4imprint#, Admiral, Anpario#, Ascential, Bakkavor#, Balfour Beatty, Berkeley Group, Breedon, Bunzl, Capital & Regional, Chemring, Clarkson, Coats#, Costain, CVS Group, Darktrace, Devro, Domino’s Pizza, Empiric Student Property, Entain, Essentra#, Flutter Entertainment, Foxtons, Galliford Try#, GlobalData, Hammerson, Headlam#, Hilton Food, Hiscox, Ibstock#, Informa, James Fisher, Johnson Service Group, Keller#, Kier#, National Express Group, Persimmon, Reach, Rentokil Initial, Revolution Bars#, Savills, SIG#, Spire Healthcare, STV, Supermarket Income REIT, Taylor Wimpey, Travis Perkins, Tritax Big Box REIT, Vistry#, Vitec, Volution, XP Power Macro highlights Geopolitical concerns are likely to remain more important to global market sentiment into next week than economic data. The Ukraine situation appears unlikely to be resolved quickly, and investors will be looking for further indications from central bankers as to how it might influence their policy approach. An extended period of elevated energy prices makes the argument for patience in the tightening phase look more compelling. Those higher costs present a headwind to growth, especially for the Eurozone. Next week’s calendar features several updates on global business sentiment and ends with the US labour market data, although that has been an unusually unreliable indicator in recent months. 25-page note #Corporate client of Peel Hunt
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28 February - 4 March 2022
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 17 February 2022. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 24-page note
Land market hotting up Land prices have risen 18% YoY to reach 2015 levels, as the market begins to heat up. Currently, strong demand in the housing market, coupled with the heavily restricted nationwide housing supply, is allowing housebuilders to offset build cost inflation with sales price inflation and continue to move margins forward. Longer term, a tougher land market should act as a barrier to entry for the established players in the industry. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 40-page note
Inflation and supply chain shortages dominate headlines, leading to a compression in valuation ratings across the sector. This is despite steady upgrades to our earnings forecasts and the demonstrable pricing power of market leaders such as Marshalls, Kingspan and Howden. We also detect a creeping nervousness in the market around the residential RMI demand cycle, following its strongest upturn for a generation, and we suspect that negative LfL volume growth may be a feature of this sub-sector in the months ahead.
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Friday, 4 February 2022. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 24-page note
A flying finish to an exceptional year The lightside sector is set to cross the finish line at breakneck speed, fuelled by stronger than expected Q4 volume and pricing momentum. We expect Saint-Gobain, Wienerberger and AWI to take podium positions and Rockwool and Geberit continue to struggle on inflationary concerns. H122 ready to rumble H122 base effect fears should fade as record-high backlog conditions and further market recovery pushes near-term volume expectations higher. Non-residential and renovation end-markets are expected to lead the pack. Inflationary pressure to persist but pricing gathers momentum We believe inflation will persist, and whilst margin squeeze remains a risk for Q122 we expect unprecedented price increases to gain momentum and rapidly catch up with costs. Distributors will be rubbing their hands as inflation leads to further margin improvement. Q421 earnings season top-pick: SGO (+) and WIE (+) SGO is our top pick with recent earnings releases from peers pointing towards stronger than expected French, UK and Nordic renovation datapoints in Q421 and a buoyant outlook in H122. Favourable weather conditions and elevated housing completions in Q421 should support WIE. Keep away from inflationary headwinds: ROCKB (-) We expect Rockwool Q4 volumes to surprise positively but for the outlook to stay pressured as energy prices hit margin. In our view, consensus expectations of roughly flat margins are optimistic. Cherry-picking between value and quality plays The value rotation has taken its toll on an otherwise quality and growth-biased sector. We find attractive opportunities in our quality basket via Sika and Kingspan, whilst cheaper alternatives including Saint-Gobain and Wienerberger are still undervalued in our view.
New build price premium reaches a record 35% The new build price premium has reached 35% above the cost of existing housing stock (historically c.25%). To us, this indicates that the housebuilders are taking advantage of the lack of stock available in the market to push through price increases in excess of build cost and labour cost inflation. With stock levels struggling to increase, this trend is likely to continue. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 40-page note
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 20 January 2022. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 24-page note
The lightside trends tracker explained This presentation is a one-stop shop for tracking leading indicators across the lightside''s key markets in Europe and the US. It also covers product volumes, product pricing and input costs to give a 360 view of the sector. The underlying datapack is available on request. Construction leading indicators: Multifamily is back and non-resi is flying Multifamily is back on its feet with double-digit growth in many regions more than offsetting weaker single-family data after the COVID-induced detached-home frenzy. Eastern Europe, France and the UK continue to surprise positively, and the US is better than we feared. Global non-residential is setting the milestone for a bumper 2022 across the board. Whilst renovation should benefit from exceptional stimulus packages in Europe, existing home transactions and DIY trends are easing off. KSP, WIE and SIKA should be most positively influenced by recent move in leading indicators. Product Volume indicators: Signs of booming renovation Insulation, plasterboard, and mortar volumes are the clear standout seemingly benefitting from the renovation push in Europe. With no signs of deceleration going forward, this bodes well for SGO, KSP, ROCKb and SIKA. Other products are normalising back towards 2019 levels. Product Price indicators: Bricks are on the move Lightside pricing is gaining momentum with strong sequential growth in Q421. US and EU brick prices are on a roll - the obvious winners are IBST, FORT and WIE. US plasterboard and insulation prices are taking a breather ahead of planned price increases in early 2022. Cost indicators: Steel normalising, energy costs still unpredictable On a positive note, raw materials such as steel and PVC, HDPE seem to be easing off their 2021 highs, though energy remains a key concern at elevated levels. Of note, coking coal and gas have increased in recent weeks. This could cause difficulty for more energy-intensive...
41% fewer homes for sale than a year ago The total number of UK homes for sale is 41% lower than last year, at 217k, as a result of restricted new stock being brought to the market at the start of the pandemic, combined with continued strong demand. The reduced supply of housing should continue to drive prices higher, which should be supportive to housebuilders. In the absence of available stock, some potential buyers will also look at renovation as an option to buying instead, which will support building merchants. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 40-page note
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 6 January 2022. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 24-page note
80% of UK mortgages remain on fixed rates Post the GFC, fixed-rate mortgage lending has grown significantly. This has been a function both of record low mortgage rates and the regulatory environment, which has favoured fixed-rate lending. As a result, 80% of outstanding mortgage balances, and millions of households, are protected against rising interest rates, a proportion that should increase given that c.95% of new lending is on fixed rates. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 38-page note
Today's news & views, plus announcements from RTO, OCDO, TPK, PHP, SUR, DXRX & BEG.
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 9 December 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 24-page note
Today, we host our 23rd Annual Investment Ideas Seminar, virtually. Looking ahead to 2022, our theme is ''New Horizons''; we look beyond the pandemic to explore emerging paths to the future - and how investors can capitalise on them. We begin the day with our Economic and Strategic Outlook, before covering four key themes for the coming year. In A World in Motion, we lift the lid on some of the biggest - and some of the freshest - mobility stories. Is Tesla all it''s cracked up to be? Is Lilium a herald of the future of flight? What enticing prospects are shaping up for Neste, for Volvo and for Ryanair? Second, no ideas conference would be complete without ESG. In a year in which we have massively built out our coverage, we explore some of the key data on ESG fund flows and select some tantalising ESG plays, not least SIG Combibloc, SAP, Levi''s and DSM. Following our successful coverage of Supply Chain Disruption, we will dig deeper into the story on shipping capacity and explore impacts on names either showing vulnerability or surprising resilience, including Inditex and HandM, Tesco, Kingspan and STMicroelectronics. Finally, in our fourth and final session, Seeking Alpha, we pick out some of our top sector plays for the coming year, 3i, Adyen, Grifols, LVMH, Stroeer Media, Unilever, plus pair trades Publicis over WPP and Compass over Sodexo and Underperforms BT and URW.
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The 2022 lightside playbook Is it time to board the lightside wagon, with buzzing non-residential trends, a hot EU housing market, roaring auto production? Or will sky-high energy prices, head-spinning wage inflation, and a pause in US housing derail the story? Our 2022 lightside inflation playbook provides a comprehensive view on winners and losers as the sector reaches a crossroads. On the cusp of a non-resi upcycle = KSP (+), AWI (+ from =) Leading indicators have hardly ever looked as bright, leaving the US and European non-residential sectors poised to grow faster than other construction end-markets. Kingspan and AWI are our top picks despite recent softness in order intakes for the former. Sika also screens well. Roaring auto production = SGO (+), SIKA (+) The auto industry is back and it''s back with a vengeance, with double-digit production growth rates in sight. The industry has a bright future following three years of hiccups, regulatory bottlenecks, and a chip shortage crisis. Saint-Gobain and Sika are best positioned in our view. Take a gap year from the US = FERG (= from +) downgrade to Neutral Housing indicators have turned red recently, with signs of pressure in both the new and existing housing markets. Whilst we believe this is a transitory headwind, we take profit on Ferguson following a very strong performance YTD. Inflation biting margins = GEBN (-), ROCKB (-) We stay Underperform on Geberit and Rockwool as ramping energy costs, wage inflation (notably in Germany) and a tougher comparison base reduce our upside vs the rest of the sector. Your house, my house, our house = WIE (+), IBST (+), FORT (+) The EU housing market remains buoyant with no signs of slowdown. We keep our Outperform rating on superior pricing power brick companies such as Wienerberger, Ibstock and Forterra.
Housing transactions drop as stamp duty holiday ends As expected, housing transactions fell 21% compared with the 2015-19 average, repeating July’s pattern of a large drop-off following the end of the Stamp Duty holiday. Looking forward, the pipeline for 1Q22 looks good, with the SSTC balance up 25% vs 2019 levels, but beyond that, we remain concerned about stock levels, which remain depressed (-45%) vs prior years. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 38-page note
The outlook for the Constructors and Contractors is generally positive as the government continues to splash the cash. For the Constructors, the National Infrastructure Strategy, Construction Playbook, the Autumn Budget and, in November, the Integrated Rail Plan, are supportive. Private sector businesses are bouncing back after Covid, and the number of profit warnings has fallen. Energy Transition presents a significant opportunity for many of the companies in our coverage, who sell the picks and shovels to the green-rush. ESG is becoming increasingly important for investors and is impacting share prices. We score our coverage. The party has been disrupted by 1) wage inflation, 2) staff shortages, 3) material shortages, and 4) material inflation, which have knocked confidence indices and share prices. We expect that we are past peak pain for these issues. Wage inflation already appears to have slowed and the Treasury data indicates lower wage inflation next year. Vacancy rates in Construction are still high. Some material shortages are not expected to normalise until Q2 22. But supply concerns appear to be reducing and import issues may be easing. Construction material prices appear to have levelled off. Construction PMIs are expansionary. Companies in the Building Material and Equipment Hire sectors have demonstrated their pricing power by recouping input cost increases. At the Recruiters, skills shortages, particularly in STEM markets, are likely to keep recruitment activity and wage inflation high in 2022, favouring SThree, in particular. Despite significant scepticism in some quarters, share prices have increased substantially over the last 12 months. But a variety of share prices like Costain, Mears, Babcock, SIG and HSS are still well below February 2020 levels. Most of these are trading at significant discounts to their five year average P/Es. In terms of valuation, we like to look at P/Es based on recovered earnings. We believe that Costain, 4imprint, RPS and Galliford can all double earnings in the medium term. Our magnificent seven buy ideas are: Babcock, Costain, Electrocomponents, HomeServe, PayPoint, Speedy Hire and SThree.
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 18 November 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 24-page note
Land values rise 15% in 3Q Land values increased by c.15% in 3Q, the highest rate of increase since the financial crisis, driven by pressure to open new outlets to meet buyer demand. Having drifted down by 2-3% pa between 2015 and 2019, values have returned to 2015 levels. Higher build costs are still being offset by house price inflation, but this is something to watch closely. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 38-page note
Travis Perkins stated in its trading update (28 October) that FY21F property profits would be £40m, which is £20m higher than we had expected. As a result, we increase our FY21F EBIT from £320m to £340m, which raises our FY21F EPS by 7% to 106p. We expect property profits to normalise next year at c.£20m and so our FY22F and FY23F forecasts are unchanged. We expect Travis Perkins to hit peak margins in FY21F and forecast competition to intensify in its core general merchanting business. We stick to our SELL recommendation and note that a P/BV of 1.7x (FY21F) is 20% above the 10-year average
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 4 November 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 24-page note
Summary of Q321 results Travis Perkins Q321 l-f-l sales increased by +13% YoY, missing our forecasts of +17%, albeit it was still a very solid quarter considering normalising DIY trends, tougher comparatives, supply-chain disruption, logistic bottlenecks, labour scarcity issues, and other external factors such as the ''pingdemic'', the summer holiday cool-off effect and the fuel crisis. Key news Despite a slightly weaker than anticipated Q321 sales performance, management increased its FY21 trading profit guidance by +7% to GBP300m (Excluding GBP40m of property profits). This is mainly driven by the benefit inflation has on stock revaluation and therefore distributor margins. Looking forward, the group expects some near-term normalisation, including in Toolstation as the group faces tougher comparatives near-term. Having said that, group margins are likely to surprise positively as inflation is expected to increase further into the start of 2022. Earnings We increase our FY21/22 EPS by +5% after integrating a more positive margin scenario near-term and into 2022. Rating and target price We reiterate our Outperform recommendation and increase our target price to GBp2,050/share, leaving more than 30% upside vs. current share price. Investment case A successful turnaround story with attractive FCF generation and a capital return focused mind-set.
Meeting Notes - Nov 01 2021
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Mortgage approvals remain 9% above pre-pandemic levels Mortgage approvals hit 72k in September; while this was c. 22% below last year’s level, it was 9% ahead of the 2015-19 average, in line with the July and August data. In our view, with the Stamp Duty holiday now in the rear-view mirror, this suggests that, following five fallow years, the housing market is entering a structurally higher level of transactions than prior to the pandemic. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 38-page note
Modest upgrades to full year forecasts
Volume expectations still undemanding We have increased our FY21E EPS estimates by 11% following the 3Q update, which underlines the scale of the price inflation (c.11%) currently working its way through the building sector. Limited volume growth in the Merchanting division in 3Q has called the longer-term growth of the business into question, but we believe our volume forecasts (2.5% FY19-23E CAGR) are conservative given the supportive backdrop. Our FY22/23E estimates are unchanged, save for a higher debt figure on higher working capital investment, which pushes our TP down c.2% from 1,900p to 1,850p. We retain our Add recommendation. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com 7-page note
Travis Perkins continued to register strong sales growth in Q3 FY2021 supported by healthy demand from the RMI end-market and store network expansion. On the back of a sustained positive trading performance, management upgraded its adjusted operating profit guidance for FY2021. However, the stock came under pressure as the market focused on high inflationary pressures amidst continuing building material and labour shortages. We will revise up our estimates and target price to incorporate the Q3 update and upgraded guidance. Positive stock recommendation maintained.
Today's news & views, plus announcements from LLOY, TPK, PHP, INCE & SEPL.
TPK PHP INCE SEPL
Price inflation driving upgrades After a strong 3Q performance (LFL sales +13.1%), Travis is raising FY21E operating profit expectations by c.10%. Price inflation of c.11% is the driving force behind the upgrades, with rising material and commodity prices being passed onto customers, while the property profit expectations have also been increased by £10m. The shares have struggled in recent weeks, falling 6%, and today’s upgrade should reverse that trend. At 1,585p, the share trade on 13.4x CY22E, which we think offers good value given the positive trading backdrop. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com
Meeting Notes - Oct 27 2021
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Click here to see the note Key Stocks Kin + Carta# (Buy, TP 350p): Guidance for FY22E is key (Tuesday 26 October, Prelims) Softcat (Buy, TP 2,100p): Pausing for breath (Tuesday 26 October) FY21 results Whitbread (Buy, TP 3,600p): Back in business but is business back? (Tuesday 26 October, Interims) Wickes (Buy, TP 360p): Strong trading expected in 3Q (Wednesday 27 October, Trading update) Howden Joinery (Buy, TP 1,065p): Upgrade time (Thursday 4 November, IMS) Close Brothers (Add, TP 1,826p): 1Q22 trading update (Thursday 18 November, 1Q trading update) Stocks Previewed Bloomsbury Publishing, Close Brothers, ConvaTec, Essentra#, Hikma Pharmaceuticals, Howden Joinery, Intermediate Capital Group, International Consolidated Airlines Group, Kin + Carta#, OneSavings Bank, RPS, Ryanair, Secure Trust Bank, Shepherd Neame#, Smiths News, Softcat, Travis Perkins, Whitbread, Wickes, Wizz Air Macro highlights The chancellor presents his budget on Wednesday against a background of a rapid improvement in the government’s borrowing position, but we believe he is likely to resist the temptation to be too generous. The spending requirements in a post-Covid-19 UK economy are considerable, and further revenue-raising measures are surely under consideration. This continued tight fiscal environment makes the Bank of England’s apparent determination to signal that a rate hike is imminent more puzzling, despite its understandable concern about the near-term inflation outlook. The balance of the recent activity and survey data, notably from the consumer-facing areas of the economy (Gfk consumer confidence, retail sales), have suggested that the recovery is slowing; today’s flash PMIs for October were a welcome exception. 11-page note #Corporate client of Peel Hunt
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 21 October 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 23-page note
25 - 29 October 2021
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Click here to see the note Key Stocks Bellway (Buy, TP 3,920p): Anticipate a strong finish, site openings the key to FY22E (Tuesday 19 October, Final results) YouGov (Buy, TP 1,480p): Ready, steady, go! (Tuesday 19 October, Prelims) GBG# (Buy, TP 1,054p): Cautiously optimistic (Thursday 21 October, 1H22 trading update) Stocks Previewed 888 Holdings, Bellway, Bloomsbury Publishing, ConvaTec, GBG#, IntegraFin#, InterContinental Hotels Group, Kin + Carta#, RPS, Smiths News, Travis Perkins, Trifast#, Whitbread, Wickes, YouGov Macro highlights After a busy week of inflation news from elsewhere, the UK CPI and PPI data are released next week. Headline inflation is forecast to dip (temporarily), but the recent more hawkish messaging from the Bank of England appears to have convinced the money markets that the first rate hike is not far away; hence the big recent jump in short-term gilt yields. With UK consumers facing a growing squeeze from fuel and energy prices, as well as NIC increases and the continued Covid-19 uncertainty, Friday’s Gfk consumer confidence and retail sales data will be significant. October’s flash PMIs are due on the same day. 9-page note #Corporate client of Peel Hunt
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Upward pressure on prices as housing stocks continue to dwindle With buyer demand stable, new instructions still falling and appraisal volumes in negative territory, stock levels remain under pressure and have fallen for each of the past six months. As a result, prices are expected to see continued upward momentum in the coming months, as buyers outbid each other for the ever-dwindling stock. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 38-page note
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 7 October 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 23-page note
Travis Perkins held its Investor Update last week, detailing the long-term drivers for the UK construction material industry and the group’s strategic plan. The company plans to offer a more digitally- and service-oriented offering to capture market share and address the long-term trends. Toolstation also offers healthy growth potential in both the UK and European markets. However, the margin improvement will remain modest, particularly as Toolstation tries to chase the market leader in the UK and expand scale elsewhere.
Planning permissions for RMI projects continue to increase Planning approvals for renovation projects (loft conversions, kitchen extensions, etc) grew rapidly in 2Q21, and sit 57% above the prior year and 22% ahead of 2Q19. They have historically proved excellent lead indictaors for RMI demand, giving us confidence that the current elevated levels of renovation demand will continue. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 38-page note
Today's news & views, plus announcements from AZN, NXT. TPK, NETW, SOLG & CMO.
Travis Perkins plc SolGold Plc
Meeting Notes - Sep 28 2021
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27 September - 1 October 2021
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Investors fear surging costs could prompt a wave of earnings downgrades. We disagree. Our fresh, in-depth work on inflation sees the sector''s earnings rise on underappreciated pricing power. We favour SGO and Owens but see Geberit (= to -) and Rockwool (= to -) as likely inflation laggards. Inflation... a booster or a drag to the sector''s earnings outlook? In this note, we reassess inflationary pressures by product and energy cost exposure across our coverage. Whilst the market fears skyrocketing energy prices will bite the sector''s earnings and margin outlook, we take a contrarian view and expect inflation to lift EBITDA by +11% in 2022, driven by pricing power, cost hedging strategies and solid operational leverage. Staying on the inflation ride, with a preference for US-exposed companies We are positive overall on the impact of inflation on the sector''s earnings outlook, with Saint-Gobain and Owens Corning our preferred names to play the theme, driven by US margin expansion. However, if most will thrive, we see a bumpier road for Geberit (= to -) and Rockwool (= to -), who are at risk of inflation undercutting consensus expectations as early as this year. A healthy underlying demand outlook... The demand outlook is still positive despite tougher comparatives in upcoming quarters and signs of normalisation in some renovation markets. The positive surprise stems from household appetite for new housing in Europe and the continued rebound in non-residential markets. ...but expect a bumpy ride in Q321 Force majeure, shutdowns, outages, shortages... these disruptive forces have likely impacted the sector''s performance in Q321. We flag these headwinds and expect a challenging results season with risk of lower-than-expected volumes and earnings missing estimates. MandA is a hot topic The sector''s deep pockets and revived appetite for larger deals should spearhead a wave of MandA deals near-term, with transformative deals on the horizon. We...
First-time buyers hit new records in 2Q21 The 2Q data saw marked increases in both FTB and mortgage mover numbers, with the former hitting the highest level we have recorded (ie, since March 2007) and the latter hitting the highest level since December 2007. While rising FTBs will be helpful politically (ownership rates will increase), the increased number of mortgaged movers will have a great impact on the whole housing chain, particularly RMI. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 38-page note
Our 4S coverage continues to perform well, as a whole, as it benefits from recovery. Our chart book helps investors identify companies whose share price performance has diverged from the main factors that influence the stock. Below, we highlight our six key picks, Babcock, Costain, PayPoint, Serco, Speedy Hire and SThree, where there are positive macro drivers that, we argue, are not fully reflected in their share prices.
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 9 September 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 23-page note
We all know CO2 has a grip on building mats, but what happens when we get more granular? Today we launch our comprehensive materiality map. For the first time, we''re delving into the full range of ESG impacts, covering both the light and the heavyside, the US as well as Europe, and the ''S'' and ''G'' in addition to the ''E''''. As investors look beyond the light vs heavyside dynamic, we''re identifying pockets of relative value across building mats and companies innovating not only to resolve the carbon conundrum, but working to develop the circular economy, reduce social impacts and improve governance. Our work leads us to a number of surprising findings, and these influence our valuations for some stocks. We upgrade HOLN (= to +) despite Syria, double down on our conviction in SGO (+) and cut BZU (+ to =).
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July mortgages drop, but remain above 2019 levels Mortgage approvals reached their highest level post the GFC over 4Q20 and 1Q21, driven by pent-up demand and increased activity due to the stamp duty holiday. While levels have retraced slightly, they remain elevated with July approvals 10% ahead of July 2019 and 29% up on July 2019 YTD. High mortgage approval levels should support sustained high levels of housing transactions throughout the remainder of the year. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 38-page note
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 26 August 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 23-page note
Wage pressure as 10% of construction workers still on furlough The construction industry had 10% of its workforce on furlough at the end of June, compared with the UK average of 6%. This is abnormally high for an industry that is ‘open for business’, predominantly based outdoors, and with space between workers. Falling furlough rates in the coming months could well have an impact on the rising wage inflation in the sector, which is 14% currently and the highest in any sector in the UK. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 38-page note
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 12 August 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 23-page note
SME builders seeing significant cost increases Some 78% of SMEs have increased prices since 1Q, with prices increasing for both wages (58%) and materials (98%). Expectations for 3Q are similar, with nearly all anticipating further material cost increases and a similar number expecting wage increases. Rising costs are presenting builders with challenges around quoting for business. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 38-page note
Meeting Notes - Aug 06 2021
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Higher property profit leads to a modest upgrade
INITIATION - Thungela, SAS All Cap Monthly – BOE taper tomorrow?, Infineon, Travis Perkins, Abcam, Morgan Sindall, Market Highlights
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UK Small & Mid Cap Dispatches: INITIATION - Thungela, SAS SMID Monthly – BOE taper tomorrow?, Travis Perkins, Abcam, Morgan Sindall, SMID Market Highlights
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Travis Perkins’ H1 results confirmed that the recovery is on track, with adjusted operating profit 14% ahead of the level delivered in 2019. Merchanting’s revenues advanced by 2% compared to 2019 despite closing 9% of its branches in 2020 and profit grew by 11% as it benefitted from branch and other cost savings. Toolstation continues its impressive growth. We see over 15% upside to our increased sum of the parts based target price of 1969p (from 1900p), and expect the forthcoming capital markets day to make Toolstation’s growth more clear to the market and to address the modernisation of Merchanting. We expect RMI activity to remain buoyant.
Inexpensive exposure to RMI market After a strong set of interims and raised guidance, we are increasing our EPS estimates by 4% in FY21E and 6% in FY22E. With the group confident around the sustainability of RMI demand, and the portfolio reorganisation now complete, the focus will turn to longer-term capital allocation priorities. With strong FCF generation we see no reason why Travis could not return £1.1bn to shareholders over the next three years, £600m ahead of the amount currently forecast. We increase our TP to 1,900p (1,820p) and retain our Add rating. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com, Kyle.Matheson@peelhunt.com 12-page note
Travis Perkins reported its H1 FY2021 results which were broadly in line with market expectations. Robust activity levels in RMI markets supported the top-line momentum, with the group also lapping soft comparables in Q2. Revenue recovery and restructuring initiatives aided the profitability improvement. Management has reinstated the interim dividend, while slightly raising the adjusted operating profit guidance for the year. We will adjust our financial estimates but expect to maintain the cautious stance on the stock valuation.
Summary of H121 results Travis Perkins'' H121 Adj. operating profit (before property profits) reached GBP147m, missing consensus expectations by -2%. The miss was driven by a lower-than-expected contribution from Toolstation and higher central costs, partially offset by stronger Merchanting margins. However, the latter benefited from GBP8-10m of provision reversals, suggesting the miss would have been closer to 8% in H121 vs. consensus underlying profit expectations. Key news Management upgraded its FY21 operating profit guidance to GBP310m from GBP300m on the back of higher-than-expected property profits. Excluding these, the guidance remains unchanged and implies consensus could revise its trading profit ex. property towards GBP280-285m from GBP296m pre-publication. On the positive front, volumes are well positioned to grow further medium-term amidst a robust construction outlook driven by buoyant RMI trends. The group reinstated its dividend policy with a 30-40% pay-out ratio with the potential to increase this further with the CMD likely to focus on sustainably higher capital returns. Earnings We trim our FY21 EBITA ex-property profits by -5% on the back of lower than previously anticipated margins in the Merchanting division. However, we turn more positive on FY22 margins and now expect a slight expansion vs. our initial forecast of margins coming under pressure. Rating and target price We reiterate our Outperform rating and increase our TP by +2% to GBp1,950/share. Investment case A successful turnaround story with attractive FCF generation and a capital return focused mindset.
SAS - Multi-asset Chartbook, Commodity snapSHOT – Lithium, Restocking Indicator flips to BUY - Possible signal confusion, PHP, Keller, Joules, Market Highlights
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SAS - Multi-asset Chartbook, Commodity snapSHOT – Lithium, Restocking Indicator flips to BUY - Possible signal confusion, PHP, Keller, Joules, SMID Market Highlights
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Upgrades after strong interims As expected, Travis has delivered a strong set of interims, benefiting from the continued recovery of the RMI sector. Adjusted operating profits for FY21E are expected to increase by c.3%, as higher property profits flow through the P&L. Longer term, the group remains confident around the sustainability of the demand trends in the RMI space, while they are also beginning to see demand return in commercial markets. At 15.5x CY22E earnings the shares are not as cheap as they once were, but with news flow expected to remain positive in the coming months, we think the shares have further to run. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Friday, 30 July 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 23-page note
Meeting Notes - Aug 02 2021
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Click here to see the note Key Stocks Coats# (Buy, TP 85p): Room for upside Domino's Pizza (Buy, TP 475p): Expect strong interim results Keller# (Buy, TP 950p): More encouraging signs TP ICAP# (Buy, TP 250p): Slower trading activity Taylor Wimpey (Add, TP 195p): Focus on site numbers Clarkson (Buy, TP 4000p): A good 1H with even better to come Stocks Previewed 4imprint#, Antofagasta, Bellway, Cineworld, Clarkson, Coats#, Domino's Pizza, Empiric Student Property, Entain, Ferrexpo, Flutter Entertainment, Genuit, Hammerson, Headlam, Hikma Pharmaceuticals, Hill & Smith, Hostelworld, Ibstock#, InterContinental Hotels Group, Joules#, Keller#, Kenmare Resources#, LSL Property Services, Mears#, Morgan Sindall, NWF#, Ocean Wilsons#, Persimmon, RPS, Secure Trust Bank, Serco, Spirax-Sarco, Taylor Wimpey, TP ICAP#, Travis Perkins, Tritax Big Box REIT, UK Commercial Property REIT, Vitec, XP Power, Zotefoams# Macro Highlights The Bank of England’s policy decision on Thursday will be accompanied by the quarterly Monetary Policy Report forecast update, which is likely to include an upgrade to its estimate of peak inflation to perhaps +3.5% YoY. A couple of MPC members have made some tentatively more hawkish noises in recent weeks, but the majority opinion is likely to remain that stimulus needs to be prolonged. There have been signs that the pace of 2Q’s UK recovery is now flattening out, likely to be confirmed in July’s final PMI readings. The Fed’s update this week underlined that evidence of a sustained improvement in the labour market remains a necessary condition for tapering to be considered, so Friday’s jobs report will be watched closely as ever. 22-page note
TPK ANTO BWY CKN HMSO HEAD HILS KLR MER NWF FOUR PSN RPS SRP MGNS TW/ VTC ZTF OCN HIK CINE UKCM LSL TCAP XPP FXPO COA ENT STB KMR BBOX IHG GEN ESP SPX FLTR DOM IBST HSW JOUL
2 - 6 August 2021
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Key Stocks Games Workshop# (Buy, TP 12500p): A record year Mitie (Buy, TP 92p): Making strategic progress Marston's# (Buy, TP 125p): Trading profitably CMC Markets# (Buy, TP 595p): Technology underpins the future ConvaTec (Buy, TP 285p): Could ConvaTec deliver another surprise? Paragon Banking Group# (Buy, TP 660p): Continuing to deliver Stocks Previewed Ascential, Bellway, Capital & Counties, CMC Markets#, Coats#, ConvaTec, Cranswick, Devro, discoverIE#, Empiric Student Property, Equiniti, Essentra#, FirstGroup, Foresight Group, Forterra, Games Workshop#, Genuit, GlobalData, Greencore, Headlam, Hiscox, Inchcape, Informa, Intermediate Capital Group, International Consolidated Airlines Group, International Personal Finance#, Jupiter Fund Management, Lancashire, LSL Property Services, Marston's#, Mitie#, musicMagpie#, National Express Group, NWF#, Paragon Banking Group#, Persimmon, Primary Health Properties#, Rathbone Brothers#, Reach, Rentokil Initial, Rightmove, RPS, Ryanair, Sabre Insurance, Secure Trust Bank, SEGRO, Serco, Smart Metering Systems, St James's Place, Taylor Wimpey, Travis Perkins, Trifast#, Unite, Virgin Money UK, Wizz Air, XP Power, YouGov Macro Highlights The first ECB meeting held under the new symmetrical inflation targeting regime reportedly featured a more robust debate than recently, but ultimately the doves continued to hold sway; the pledge to maintain policy support is fully intact. Next week’s FOMC meeting is likely to be a holding operation, with the big decisions deferred to the Jackson Hole symposium in late August. This week’s UK data showed that June’s retail sales volumes received a useful boost from Euro 2020 stocking up; but the disruption from the ‘pingdemic’ to businesses across a range of sectors is already evident in the decline in July’s flash PMI readings, and presents a challenge to the 3Q growth outlook. Next week’s release calendar is light. 26-page note
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Record number of housing transactions in June Housing transactions in June reached 213,000, 95% higher than the 2015-19 average and a record June performance (+14% from prior peak in 2004). Activity was elevated due to the last month of the Stamp Duty holiday and total annual transactions should be 1.4-1.5m, which should support continued RMI demand into CY22. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 38-page note
26 - 30 July 2021
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Friday, 16 July 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 23-page note
“Price is what you pay. Value is what you get” (W. Buffett). Our Kingspan research initiation last week (7 July) shied away from a BUY recommendation on valuation grounds. Volution is one of our key BUYs in the sector and, in our view, offers better value than Kingspan whilst providing similar exposure to the de-carbonisation theme. We also contrast the valuation metrics of two stocks whose earnings are geared into the residential RMI cycle – Travis Perkins (SELL) and Epwin – noting that the former trades at a significant valuation premium to the latter.
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What about the ''wow'' factor? The upcoming results season is likely to unveil record-high earnings, surpassing consensus expectations once again. However, the recent rerating suggests the ''wow'' factor is priced-in on most names. Mounting inflationary headwinds and a more challenging base in H221 could lead to muted share-price reaction post results. We identify our key Q221 conviction ideas below. After 355 years, a story reborn... ''I am Saint-Gobain'' Saint-Gobain remains our top conviction idea in the medium term, while the near-term outlook has never looked this promising. Despite having pre-released record-high margin expectations for H121 we think consensus is too conservative and stand +7% above it on FY21 operating profit. Bricks and tiles going through the roof The brick players Ibstock, Forterra and Wienerberger are likely to benefit from stronger than anticipated trends in the single-family housing market and incremental brick and tile price increases. UK roofing tile shortages is an overlooked tailwind for WIE near-term. Distribution... winning the inflation battle near-term Distribution companies such as Ferguson and Travis Perkins are the overlooked winners of the inflationary battle. Near-term margins are set to expand whilst booming construction trends should lead to disproportionate operational leverage. 2022... what''s not to like? Feedback from our recent marketing suggest investors are worried 2021 is as good as it gets. Limited visibility into 2022 and stratospheric valuation multiples across the lightside universe are often cited. However, looking at recent developing trends we see attractive growth opportunities in 2022 including 1) the sharp rise in EU single family housing, 2) non-residential demand rebounding, 3) Recovery and Resilience stimulus packages supporting future renovation work and 4) a likely normalisation of raw materials which could support margins next year.
Build costs continue to rise Construction costs continue to rise as the supply chain struggles to adapt to rapidly-recovering demand. The latest new build material costs for May show an 11% YoY increase (slightly above April’s 10% increase). Currently, house price inflation is more than offsetting cost increases, but the issue will remain a key talking point as we move into results season. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 38-page note
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 1 July 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 23-page note
London’s domestic population continues to fall London’s domestic population fell by 1.1% in 2020. In contrast to prior recessions, the outflow increased, rather than tightened. The furlough scheme should have reduced the impact of any ‘flight to quality’ and home working no doubt had an impact. At the margin, the continued decline of London’s domestic population should help to ease affordability pressures. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 38-page note
Meeting Notes - Jun 25 2021
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Updated guidance leads to upgrades
Travis Perkins is riding the crest of a wave. Following its unscheduled trading update on Tuesday (21 June) we raise our FY21F underlying operating profit from £255m to £320m but remain sceptical on the group’s longer-term fundamentals and retain our SELL stance with a price target of 1500p.
Mitie, Travis Perkins, Genus, Grafton, Wickes, Joules, Vertu Motors, Market Highlights
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Mitie, Travis Perkins, Genus, Grafton, Wickes, Joules, Vertu Motors, SMID Market Highlights
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Travis Perkins yesterday announced that management expects 2021 operating profit to be materially ahead of consensus expectations. We have raised our 2021E EPS forecast by 18% to reflect improving trading. Merchanting is ahead of our expectations, with revenues in April and May 6% ahead of 2019, despite 8% fewer branches. Trading improved from -3% in Q1 as prices are rising, and passed on, and volumes benefitted from improving home refurbishment spending. We have raised our target price to 1900p on rising estimates and maintain Buy.
Upgrades after strong trading update Yesterday’s unscheduled trading update indicated that the positive trends seen in the first quarter have continued through April and May, and operating profits for the year will be materially ahead of expectations. As a result, we have increased our FY21E operating profit estimate by 35%, to £305m, driven by the better performance currently being seen in the Merchanting business. While Travis remains well placed to continue to benefit from the upturn in RMI activity, we make no changes to FY22 and FY23 estimates, and we maintain our current target price (1,820p) and Add rating. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com 6-page note
Travis Perkins announced an ad-hoc trading update for Q2 FY2021, registering the strong sales growth in the months of April and May as a result of healthy activity levels in the domestic and commercial RMI markets. Management now expects FY2021 adjusted operating profit to be materially ahead of current market expectations. The share price jumped c.7% on the back of the trading update. We will raise our financial estimates and target prices, but most likely retain our cautious stance on the stock.
BISS post-conference note Our recent BISS conference reassured in terms of end market conditions remaining robust, with new housing, housing rmi, infrastructure and warehouse/logistics all flagged as strong markets. Material cost pressures have risen due to a variety of supply side issues combined with a quicker recovery in global demand. Labour costs are slowly raising their head. But the strong demand backdrop is allowing the sector to fully recover these costs, although there may well be a dilutive impact on margins. Meanwhile, recovered balance sheets see companies pursuing organic investment and M&A deals more actively. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Kyle.Matheson@peelhunt.com 9-page note
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 17 June 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 23-page note
Materials cost inflation reaches 8.3% YoY There has been a big jump in building materials prices in the last few months, as a number of supply chain issues have tightened, which have combined with a step-up in construction activity across a number of different markets and geographies. The rate of increase is now back to the highs seen in the mid-noughties boom. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 35-page note
Meeting Notes - Jun 11 2021
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Forecasts updated following corporate action
Updating model post P&H disposal and reducing to Add We are updating our model for the disposal of the P&H business, and downgrading from Buy to Add following a period of strong performance. However, we remain positive on the company and its end markets, and are mindful of the potential for upgrades should demand accelerate again and margins tick up on the back of rising materials inflation. At current prices, the shares trade at c.15x CY22E earnings. Our TP rises slightly from 1,750p to 1,820p. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com 6-page note
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 3 June 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 23-page note
May sees double-digit house price increases The Nationwide HPI increased by 11% in May. The increase was the highest in almost seven years, as homebuyers continued their race for space. Though May’s increase was set against easy comps given the restricted lending conditions last year, the market is clearly in great shape as we enter the summer. With stock levels still constrained, price increases are likely to continue, in our view. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 35-page note
Dancing the light fantastic The lightside sector had a stellar start to the year, with 80% of companies beating Q121 expectations led by rock-solid renovation trends, booming US housing activity and pricing power. We expect these drivers to continue near term, fuelling further consensus upgrades. Key conviction idea 1: West side... bright side The US offers an unparalleled construction boom driven by record-high housing activity levels, buoyant renovation and the promise of an infra and non-residential stimulus package. Companies exposed to the US benefit from disproportionate operational leverage and pricing power. Key conviction idea 2: Surf the renovation wave Construction activity is making a faster than expected comeback in Europe, fuelled by an EU renovation wave and strong demand for new-build activity. Pandemic conditions seem to be receding, with volumes achieving above 2019 levels in many countries and end-markets. Key conviction idea 3: Winning the battle against inflation Inflation is likely to be a challenge but we believe fears are overdone with the sector benefitting from underappreciated pricing power amidst booming construction demand, low inventories and proactive pricing strategies. Even better, we expect many companies to expand margins further. How to position yourself going forward? Despite a decent run YTD (+7% vs. MSCI Europe) the lightside sector remains attractive. We see the strongest consensus upgrade potential in UK domestic names Travis Perkins, Ibstock (= to +) and Forterra (= to +). We have a preference for US insulation and plasterboard companies to play surging pricing power (Saint-Gobain, Owens Corning) and continue to be overweight EU renovation winners (Sika, Geberit). The recent weakness of WIE shares on disappointing Q121 numbers is an attractive entry-point to play booming global single-family housing. We upgrade Rockwool to Neutral given the very strong outlook for stone wool volumes and margins.
Travis Perkins announced the disposal of its Plumbing & Heating distribution business for £325m. The divestment is in line with management’s strategy of focusing on trade customers and streamlining operations. While the sale price was ahead our NAV estimate, the cautious stock recommendation is being maintained citing sustainability concerns with respect to elevated activity in the UK residential market and the expected unwinding of government support schemes in the second half of the year.
Today's news & views, plus announcements from AZN, CBG, INVP, TPK, SEIT, RQIH, YEW
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HomeServe, Healthcare this Week - ASCO in Absentia, Media Weekly - Proposed Mega Merger, Travis Perkins, Tyman, Youngs, Gattaca, SMID Market Highlights
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HomeServe, Healthcare this Week - ASCO in Absentia, Media Weekly - Proposed Mega Merger, Travis Perkins, Tyman, Youngs, Gattaca, Market Highlights
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Travis Perkins has announced that it is selling the last of its Plumbing & Heating division to private equity for £325m, £45m higher than our valuation. The difference is worth around 18p per share, after disposal costs. We see upside as Toolstation is now a meaningful part of the group, and its growth should be driver of value creation. The core of Travis is improving and the group has excellent exposure to UK RMI, where activity will continue to benefit from rising housing transactions.
P&H business sold for £325m Last night Travis Perkins announced the sale of the P&H business for £325m, a c. 7x EV/EBIT multiple and c. 20% premium to a similar disposal by Ferguson. The proceeds will be returned to shareholders via the combination of a 35p special dividend and share buyback. The disposal leaves the group free to focus on the core task of returning the general and specialist Merchanting businesses to sustained growth, and accelerating the roll out of Toolstation across the UK and Europe. A task that should be easier given the supportive market backdrop. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com
Higher LTV mortgage rates falling Having risen steeply during the pandemic, higher-value LTV mortgage rates are beginning to fall. The 95% products fell by 17bp and 15bp for 5-year and 2-year terms respectively. Lower rates suggest increased competition at higher LTVs, implying lenders are acting with greater confidence and anticipate strong house prices for the foreseeable future. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 35-page note
It’s been another remarkable six months. Public sector focused companies are benefitting from the loosening of the purse strings and plans to ‘Build Back Better’. Private sector oriented companies should benefit from the rebound in private sector confidence. Large companies like Balfours and Serco have been winning market share. If we look hard enough we can identify some negatives. Increased working from home may adversely affect Mitie, but the synergies from Interserve will carry it through. Input price inflation is a worry for some, although we expect it will be lost in the ‘noise’ from improving volumes and margin recovery. Indyref2 may result in some volatility at Babcock, but the underlying investment case is strong, and Galliford will probably benefit from the increased infrastructure investment in Scotland, at least in the short term. Our analysis shows that turn-arounds are hard, with only Balfours producing a positive relative return from the start of a new CEO. However, investors have been well rewarded for supporting fund raises. After Kier delivered a 38% one-day return to those that invested in its placing, we expect Staffline will provide new opportunities for fresh equity investment. While many investors look the other way, scarred by years of underperformance from many of the stocks in our coverage, the prospects for the next decade look much brighter than the last. Share prices are not hanging about – Mitie, Costain, Galliford, Keller, Morgan Sindall, RPS and Staffline have all increased by >50% over the last six months – and short positions are closing. However, valuations are still compelling; most companies are trading below pandemic levels and most of our construction coverage trades on a CY 2019 EV/EBITDA of <5x and all (except Renew) trade on a recovered EV/EBITDA of <5x. When out-of-favour stocks that are cheap surprise with large upgrades, the share price might go up! This is in sharp contrast to the Building Materials sector, where shares have performed well and are trading at multiples not seen for a long time, and in the case of companies with US exposure, such as Ferguson and Ashtead, are trading at all-time highs. Our key buys are Babcock, Costain, FRP, Gateley, PayPoint, Speedy Hire and Travis Perkins.
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Still V+ but with an eye on the Liquidity As Europe re-opens from its lockdown restrictions, we think that the V+ shape will materialise and should drive a sustained upgrade cycle into European equities. The strong numbers, posted throughout the results season, so far show that the markets were still underappreciating the resilience of businesses. Another upgrade cycle appears overdue. However, the narrowing window of liquidity and increasing tapering risk are now becoming a larger part of the equation. An increase in real yields could make more richly valued shares at risk of sharp de-rating. Spreading booming trends Growth is about to spike in all major economies with upside surprises now likely to come from Europe where we continue to believe the recovery potential is underestimated. We expect the Eurozone PMI to jump to c.65 in the coming months and GDP to grow by 5% in 2022 (vs 4% in consensus). At a time when there is more upside than downside risks on inflation, upward volatility on bond yields looks likely. In Europe, we nonetheless think the pending ECB strategic review will help the doves and ensure there is no ''monetary cliff'' next year. Adding ''Back to Work'' names We aim to balance the current macro backdrop with 1) initial re-opening value rotation risk; 2) near-term de-rating risk and, 3) likelihood of a sustained V+ recovery. We are adding back to work exposure to our Key Ideas. Our list of favourite picks has been lagging during the value rotation and the delay in the European economy re-opening from Lockdown restrictions. We add further commodities and construction exposure to our Deep Value list. We add L''Oreal to our Emerging Markets Consumer list. No changes are made to our UK High Conviction and MandA lists. Changes to the lists Deep Value: IN - Glencore, Royal Dutch Shell, Taylor Wimpey; OUT - BP Emerging Consumer: IN - L''Oreal Key Ideas: IN - Total, BMW
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Friday, 7 May 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 23-page note
Housing RMI planning permissions rise 17% in 4Q20 Planning permissions for household developments (extensions, loft conversions, etc) increased by 17% in 4Q20, with increases in every region of the UK. Historically, these have been an excellent lead indicator for RMI demand, with consumers using the heavy materials for construction and fit-out, followed by soft furnishings and appliances for the finishing touches. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Charles.Hall@peelhunt.com, John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com, Andrew.Shepherd-Barron@peelhunt.com 25-page note
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Commodity prices continue to rise Commodity prices have increased significantly in recent months, as supply chains have struggled to adapt to increased demand. Current expectations are that these moves are transitory, and will reverse once supply and demand normalise. More permanent moves could have negative implications for interest rates. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 34-page note
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Media Weekly, GlaxoSmithKline, STMicroelectronics, Travis Perkins, Dixons Carphone, Aixtron, HSS, Futura Medical, Market Highlights
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Media Weekly, Travis Perkins, Dixons Carphone, HSS, Futura Medical, SMID Market Highlights
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Updating numbers and reiterating Buy post WIX demerger We update our numbers following the demerger of Wickes. Headline revenues and PBT fall by 17% and 21% in FY21E and by 16% and 20% in FY22E. The share consolidation reduces the scale of EPS declines to 11% and 10%. With over half of the group’s revenues coming from the RMI sector, Travis remains well placed to benefit from the strong market conditions, while the housing and commercial-focused businesses should see improved trading performance as we move through the year. At c. 12x FY22E earnings the shares are inexpensive and we retain our Buy recommendation with a 1,750p target price. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com 6-page note
A new beginning Travis Perkins successfully demerged its Wickes DIY business on the 28th April 2021. We believe this turns over a new page for management, enabling the divestment of the plumbing and heating division to focus energy on the core business via organic growth and bolt-ons. Strengthening its building merchant leadership We expect management to capitalise on the group, refocusing on its core DNA with plenty of medium-term opportunities to grow both organically (Toolstation) and through MandA. We believe the group could also look at new attractive verticals including HVAC and lightside specialities and further invest in digitalisation, the product offering and branches in an effort to grow market share. Shareholder returns could be back We anticipate the group will restart its dividend policy in the summer and we would expect more to come on the shareholder return front post the divestment of the plumbing and heating division and the incremental value generated as a merchant business. A favourable UK renovation outlook The UK renovation outlook has never looked this bright; homeowner equity is at record highs, equity withdrawal rates are healthy, interest rates are low and existing home transactions are booming. This should drive pent-up renovation demand until the decarbonisation renovation wave picks up the pace to drive 30 years of structural growth. We are optimistic on the UK distribution sector and our FY21/22 EBIT estimates stand +16%/21% above consensus. Rating and investment case We have updated our valuation methodology to reflect the divestment of Wickes and the higher implied multiple of building merchants vs DIY. We therefore apply a 6% FCF yield ex-growth CAPEX vs. 6.5% previously. This implies a 12x FY22 EV/EBIT multiple at our target price which we view as sensible and still well below peers such as Grafton or Howdens Joinery.
Today's news & views, plus announcements from FLTR, RSDA, SDR, SN, STJ, ULVR, CTEC, HWDN, INCH, MGGT, TPK, SEPL, APP, AEXG
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We publish revised estimates and target price following the Wickes demerger, which went live yesterday. We continue to see good upside in Travis’ shares even as they held up strongly through the demerger. We have reflected some of the positive read-across from Grafton in our estimates, upgrading core forecasts by 4% this year and 2% next. We see upside on a sum of the parts basis as Toolstation should be better reflected in the group valuation. Travis’ core merchanting activities are improving. We do not see the recovery in home improvement activity as a blip; it is underpinned by rising housing transactions.
Wickes’ has transformed into a digitally-led, integrated product and services business, consistently outperforming its markets. It is uniquely positioned and well-balanced, and management now has the freedom to invest behind its multiple growth levers. On prudent assumptions, we still forecast a robust 7.5% FY20-23E PBT CAGR, with upside risk driven by RMI momentum and self-help. Alongside a growing material net cash position and solid dividend, the market should begin to appreciate Wickes’ high quality.
Following the demerger of Wickes, we have updated our financial models. We have also increased our revenue and EBIT forecasts for Toolstation given its strong performance in FY21 Q1. Ex-Wickes, the group has a higher working capital requirement, higher financial leverage but lower reliance on IFRS 16 leases and therefore lower operating leverage. Our base case SOPs valuation for Travis Perkins (ex-Wickes and post share consolidation) is 1320p, which is 14% lower than the current share price. SELL.
Today's news & views, plus announcements from BATS, PSN, LLOY, LSEG, SBRY, TPK, NETW, POG, SOLG, WIX, MUL
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26 - 30 April 2021
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Meeting Notes - Apr 26 2021
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday 22 April 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 23-page note
Retail Sector Upgrade Cycle, Wickes, Travis Perkins, Real Estate Investors, Commodity snapSHOT, Shanta Gold, Market Highlights
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Retail Sector Upgrade Cycle, Wickes, Travis Perkins, Real Estate Investors, Commodity snapSHOT, Shanta Gold, SMID Market Highlights
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We raise our target price from 1650p to 1900p as we dig deeper into the sum of the parts. We expect Wickes to trade at a significant premium to the group. Toolstation is no longer small enough to ignore and should be highly valued for peer-leading growth. Core merchanting is improving and the specialists have leading positions. We do not see the recovery in home improvement activity as a blip; it is underpinned by rising housing transactions.
Wickes’ has transformed into a digitally-led, integrated product and services business, consistently outperforming its markets. It is uniquely positioned and well-balanced, and management now has the freedom to invest behind its multiple growth levers. On prudent assumptions, we still forecast a robust 7.5% FY20-23E PBT CAGR, with upside risk driven by RMI momentum and self-help. Alongide a growing material net cash position and solid dividend, the market should begin to appreciate Wickes’ high quality.
Don''t despair of margins on inflation concerns... just choose wisely ''Inflation will hurt margins'' - this is investors'' knee-jerk reaction to rising costs in 2021. Our differentiated view concludes buoyant construction demand, low inventories and tight utilisation rates should suffice to offset gross margin pressure whilst operational leverage delivers strong prospects for consensus earnings upgrades. We stand +7% above consensus on FY21 EBITDA. Hiding below 2019 levels... an easy win for sector upgrades Most companies across the sector have adopted cautious guidance, implying 2021 volumes will stay below 2019 levels. We believe the impact of COVID on the sector is a net-positive and with most indicators in the green, it looks like a slam-dunk finish to this year and next. Take a flight to the US... the promised land, with OC and SGO our best ideas The US lives up to its reputation as the land of opportunity, with signs of a faster and steeper non-residential recovery and recent price hikes running above the level of cost inflation for most products. Owens-Corning and Saint-Gobain are our best ideas to play the US upcycle. Fancy a trip to the land of the bricks? Play WIE with opportunities in UK domestic Cautious industry guidance has overshadowed the surprisingly strong acceleration in European housing permits, which, when combined with limited inflationary pressures, should translate into positive earnings surprise. Our preferred name to play the theme is Wienerberger, there are opportunities in Neutral-rated UK domestic Ibstock and Forterra, given their cautious guidance. Taking profits on near-term inflation losers - KSP and GEBN to Neutral Despite standing above consensus for both names, we believe the recent share price rally is a reflection of likely consensus upgrades and see the exacerbation of steel and resin costs as a headwind for margin recovery near term. We downgrade both companies to Neutral.
The UK Construction Total Activity Index registered 61.7 in March, up sharply from 53.3 in February, driven by Housebuilding (64.0) and Commercial Construction (62.7). The latest reading signalled the construction PMI at the highest rate since September 2014. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 29-page note
Travis Perkins continued its strong performance from H2 FY2020 into Q1 FY2021, delivering 17.4% lfl sales growth ahead of market expectations. No wonder, the stock was up c.2% at time of writing. We expect the group to maintain its growth momentum as the UK emerges out of the lockdown measures with the vaccine roll-out to underpin economic and construction activity. Furthermore, the soft comparable in the near term should help.
Today's news & views, plus announcements from ENT, TPK, AO, CAY, CAPD, POLR, WIEN, BRK, THG, ROO
INITIATION - Uniphar, Babcock, Sanne, Factor Tilts, Electrocomponents, easyJet, Puretech, Market Highlights
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INITIATION - Uniphar, Babcock, Sanne, Factor Tilts, Electrocomponents, easyJet, Puretech, SMID Market Highlights
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Strong Q1 trading, outlook still positive RMI demand in the UK is recovering, and Travis Perkins is a key beneficiary of this trend. LFL sales (ex Wickes) increased by >17% in Q1, boosted by pent-up demand and increased housing transactions – trends we expect to continue for the foreseeable future. Wickes is seeing similar trends, with LFL sales up 20% in the period, while the demerger is expected to take place on 28 April. We remain bullish on the outlook for the sector and believe Travis offers good value with the shares trading at 12x CY22E earnings. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com
Meeting Notes - Apr 14 2021
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Further volume recovery in Q121. Trading update 15th April 2021 Travis Perkins will publish its Q121 trading update on the 15th April 2021. We forecast c. +8.6% lfl revenue growth (excluding Wickes), driven by strong renovation trends and continued recovery across most end-markets. 2021 offers a lot of room to surprise positively Supportive housing policies and low interest rates have propelled housing transactions, which have increased by +33% YoY in the last 3 months. We believe the outlook for distributors and Travis Perkins is brightening and view the company guidance and consensus expectations as too cautious, offering plenty of room to surprise positively. Our more optimistic earnings expectations stand +13% above consensus We increase our top-line and earnings expectations by +4% and +10% respectively as we turn more positive on the UK renovation market outlook. Our FY21 EBIT expectation now stands +13% above consensus. We have not yet reflected deconsolidated Wickes as part of the planned demerger in our earnings estimates. Strategic update in Q3 is the key catalyst As the deconsolidation of Wickes is set to be effective at the end of April, we turn the page and view the group upcoming investor day in Q321 as the key catalyst. We expect the focus will be on capital allocation, including shareholder return policies and long-term CAPEX/MandA strategies. Rating and target price Our higher earnings expectations drive our target price to GBp1,810/share (from GBp1,650), suggesting 10% upside. We anticipate FY21 consensus earnings to increase as the reporting season highlights stronger UK macro trends. We reiterate our Outperform rating.
Bulls of Travis Perkins point to the Sum of the Parts (SOPs) valuation case. However, we think fair value is only c.1275p on this basis, which is 23% below the current share price. This is supported by the 5-year average P/BV multiple. Following its FY20A results (2 March) we have downgraded FY21F EPS by 11% and upgraded FY22F EPS by 3%. We now expect a more gradual margin recovery in Merchanting and Retail, and FY21F EBIT losses of £16m at Toolstation Europe, as indicated by management. We also add FY23F to our models which we note still include Wickes (due to be demerged 28 April).
12 - 16 April 2021
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Click here to see the note Key Stocks Oxford BioMedica# (Buy, TP 1,150p): Business mix, margins and outlook will be attention-grabbers (Thursday 15 April, FY20 results) PureTech Health (Buy, TP 930p): Cash runway and internal pipeline progress the key focus (Thursday 15 April, FY20 results) Travis Perkins (Buy, TP 1,740p): Expect continued strength in RMI (Tuesday 27 April, Trading update) Stocks Previewed Ashmore, Bakkavor#, Breedon, Brooks Macdonald#, Cranswick, Devro, discoverIE#, Domino’s Pizza, Electrocomponents, Entain, Ibstock#, Jupiter Fund Management, Lok’nStore, Next 15, Norcros, Oxford BioMedica#, Plus500, Polar Capital#, PureTech Health, Rentokil Initial, Revolution Bars#, SigmaRoc#, Taylor Wimpey, Travis Perkins, Trifast#, Watkin Jones# Macro highlights Risk appetite has been bolstered this week by improving lead indicators, which have underpinned investor faith in the post-pandemic recovery story. Supportive central bank comments have ensured that bond yields remain tame. Next week’s data diary features more backward-looking readings from the major economies, with the manufacturing numbers likely to continue their recent understandable outperformance of the consumer-facing measures. 14-page note #Corporate client of Peel Hunt
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday 8 April 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 23-page note
TPK BDEV BWY BKG BREE CSP CRST ECEL FERG FORT FOXT GLE GFTU BOOT HWDN IBST KLR MSLH NXR PSN GEN PURP RDW SVS SRC SPR TW/ VANL VTY FAN WJG ALU LSL SHI
Click here to see the note Key Stocks Hilton Food (Buy, TP 1,380p): Exploring growth opportunities (Wednesday 7 April, FY20 results) ASOS (Buy, TP 6,500p): Ready for lift-off (Thursday 8 April, 1H results) Dunelm# (Buy, TP 1,600p): Outperforming in lockdown (Thursday 8 April, Q3 trading update) Hyve Group (Hold, TP 140p): Europe vs insurance (Thursday 8 April, H1 update) Impax Asset Management# (Buy, TP 760p): Another strong quarter (Friday 9 April, Q2 AuM update) Stocks Previewed ASOS, Brooks Macdonald#, Cranswick, Curtis Banks#, Dunelm#, Electrocomponents, Hilton Food, HomeServe, Hyve Group, Impax Asset Management#, Jupiter Fund Management, Norcros, OneSavings Bank, Oxford BioMedica#, Polar Capital#, PureTech Health, Revolution Bars#, SigmaRoc#, Travis Perkins, Watkin Jones# Macro highlights Confirmation of the $2+bn US infrastructure spending plan should underpin the building cyclical recovery story, while potentially introducing further longer-term upward inflation pressures. Perhaps the most interesting element of next week’s final PMI readings will be the cost implications of ongoing supply chain bottlenecks across a number of key industries. PPI data from the major global economies should provide further evidence of how those trends are feeding into factory gate prices. 10 page note #Corporate client of Peel Hunt
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Analysis of Google Trends data shows the search term “Builders near me” is at five-year high, and has surpassed the levels it reached last summer, at the start of the RMI boom in the UK. In our view, this suggests that demand for RMI will continue to grow strongly through FY21E and perhaps into FY22E, as consumers deploy their pent-up savings into the home. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 29-page note
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday 25 March 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 23-page note
Travis Perkins has resumed the demerger of the Wickes banner after the process was suspended last year following the onset of the pandemic. Wickes is expected to be listed as a standalone company on the LSE on 28 April 2021 with existing Travis Perkins shareholders to be issued new Wickes shares in the ratio of 1:1.
Today's news & views, plus announcements from CPG, ITV, PHP, APAX, CMCX, TPK, SHI
Travis Perkins plc SIG plc
Today's news & views, plus announcements from HLMA, BWY, DPLM, TPK, PDG, KWS, KETL, TAVI, TPFG
Wickes demerger circular Having restarted the formal Wickes demerger process on 2 March, Travis Perkins has indicated the circular for Wickes’ listing on the Main LSE will be published today. The process should help unlock some value for TPK shareholders and offer investors an attractive and purer way of playing the recovery in the UK renovation market. A Wickes CMD on Friday will be helpful in guiding valuation thoughts. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com
The total listed homes for sale in the UK on Rightmove is at a 20-year low of 314k, down 24% from the year before (415k) and down 22% from the five-year average (401k). Current demand is greatly outweighing supply, driven partly by buyers looking to take advantage of the stamp duty holiday. This shortage should be supportive for new housbuilders. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 29-page note
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Friday 12 March 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 23-page note
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Meeting Notes - Mar 08 2021
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Summary of FY20 results Travis Perkins'' FY20 EBITA (exc. property profits) stood at GBP216m, 1% ahead of consensus expectations. The magnitude of the beat was slightly disappointing given booming DIY trends in H220. December lockdown measures interfered with the pace of earnings recovery in our view. Key news Following the pause of Wickes demerger process in 2020, the process is restarting, with the closing expected as early as the end of April, a major near-term value creation catalyst. The disposal of the PandH division is once again put on hold near term with the priority being on further improving the division margin profile following an impressive achievement in H220. We think this is the best decision to achieve value-accretive exit multiples. In terms of shareholder returns, the group will reinstate a dividend in 2021 but comments during the call suggested the payout ratio will remain below pre-covid levels in 2021 as Travis Perkins will fund the EUR130m capitalisation of Wickes as part of the demerger process. The group did not provide much granularity on the 2021 outlook but management confirmed the early start of the year has seen similar trends as Q420. Earnings We cut our FY21 EBITA expectations (exc. property profits) by -9%, reflecting a more conservative view on retail margins and lower margins on the high growth Toolstation division. Rating and target price We maintain our Outperform rating but cut our target price to GBp1,650 (from GBp1,700) to reflect our lower earnings estimate, slightly offset by lower CAPEX estimates. We have also trimmed our TP yield to 6.5% vs. 6% previously given the pause on the PandH disposal and the more prudent shareholder return approach near-term. Investment case A turnaround story with a portfolio recycling strategy likely to drive a re-rating.
95% LTV mortgage rates spiked post Covid-19 and currently sit at 2.5x 75% LTV loans, making the few high LTV mortgages that currently exist unaffordable for many. Not only could the recently announced MIG scheme increase 95% LTV lending, it could also close the rate gap, with the potential to bring more FTBs (the bedrock of the housing market) into the fold. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 29-page note
Robust end to the year leads to upgrades
The Budget is helpful for our coverage as the extension of furlough and other supports boosts the economic outlook. The Stamp Duty holiday extension was anticipated, but is more generous than expected. A Mortgage Guarantee scheme is announced, as expected, but it runs only until December 2022. The super-deduction of capital allowances will benefit building material manufacturers. The increased corporation tax rate is negative for all the shares we cover, and although it was flagged in advance, the scale is surprising. The reiteration of infrastructure plans is positive.
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UK SMID Monthly, SAS - UK Budget: Eat, Shop, Repeat; Leisure - budget optimism, Travis Perkins, John Laing, Plus500, AB Dynamics, Origin, Galliford Try, Futura Medical, SMID Market Highlights
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Inexpensive exposure to RMI market Travis continues to offer inexpensive exposure to the UK’s recovering RMI market. We expect RMI demand to continue to improve through the year, with pent-up demand likely to come through as restrictions are removed and the logistical complexities of having tradespeople in the house ease. The longer-term equity story will depend on the success of the group’s plans to reinvigorate the core Green and Gold business, but with the shares trading on just c.11x CY22E earnings, we are happy to retain our Buy rating. However, we reduce our TP to 1,740p after making minor reductions to our estimates. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com 15-page note
Travis Perkins’ FY results were better than we expected, although only narrowly ahead of consensus. The highlights were the strong cash flow performance and the 34% increase in H2 profits achieved by Wickes. We have upgraded our estimates by 10% for 2021 and 2% for 2022 as strong trading in Q4 carries into Q1 2021. The Wickes demerger should create value as the market should rate it highly for its fully integrated online proposition. We see 17% TSR upside to our unchanged and conservatively set sum of the parts target of 1650p.
Today's news & views, plus announcements from RIO, TW, CRDA, TPK, PHP, MGGT, SHI, WHR
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FY20 in-line, RMI market continues to grow Travis delivered FY20 results in-line with expectations, with a recovery in demand in the second half of the year somewhat offsetting the severe declines in H1. The RMI market has been the standout performer, with Wickes (+20%) and Toolstation (+30%) delivering strong growth in the second half of the year. Comments on the outlook are limited, but these trends have continued in the first two months of the year, and we expect the strength of RMI demand to continue through FY21. The shares have slightly lagged the wider sector in recent weeks, but remain inexpensive, in our view, trading on c. 11x FY22E earnings. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com
SAS - Multi-asset Chartbook, ECI - Restocking Indicator flips to BUY, Restaurant Group, Hotel Chocolat, Speedy Hire, DX, SMID Market Highlights
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SAS - Multi-asset Chartbook, ECI - Restocking Indicator flips to BUY, Restaurant Group, Hotel Chocolat, Speedy Hire, DX, Market Highlights
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Meeting Notes - Mar 01 2021
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday 25 February 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 23-page note
Click here to see the note Key Stocks Rotork (Buy, TP 400p): Conservative FY21E organic growth assumptions Persimmon (Buy, TP 3280p): Focus on rebuilding outlets Coats# (Buy, TP 80p): New opportunities for stronger growth ConvaTec (Add, TP 240p): Focus will be on FY21E guidance, potential for a positive margin surprise Essentra# (Buy, TP 420p): In good shape with plenty of self-help Domino's Pizza (Buy, TP 425p): A badly neglected share price Stocks Previewed 4imprint#, Abcam, Aggreko, Anpario#, Arix Bioscience#, Ascential, Ashtead, Avast, Bakkavor#, Bellway, Breedon, Bunzl, Capital & Counties, Capital & Regional, Chemring, Coats#, ConvaTec, Curtis Banks#, CVS, Derwent London, Devro, Direct Line, Domino’s Pizza, Entain, Essentra#, Eurocell#, Ferguson, Flutter Entertainment, Forterra, Foxtons, Galliford Try#, GCP Student Living, Go-Ahead#, Hammerson, Headlam, Henry Boot#, Hill & Smith, Hiscox, Ibstock#, International Personal Finance#, IWG, James Fisher, John Laing Group, John Menzies#, Keller#, Kin + Carta#, Marshalls#, National Express Group, Ocean Wilsons#, Persimmon, Polypipe, Rathbone Brothers#, Reach, Rentokil Initial, Rotork, Savills, Senior, Signature Aviation, Spirax-Sarco, Spire Healthcare, STV#, Supermarket Income REIT, Synthomer, Taylor Wimpey, TP ICAP#, Travis Perkins, Tritax Big Box REIT, Ultra Electronics, Vectura, Vistry#, Volution, XP Power Macro highlights A busy week of global PMI indicators ahead, but these nominally forward-looking measures are less important than usual, with markets already fully embracing the reopening trade. Updates from central bankers this week, especially Fed Chair Powell, have reassured investors that monetary policy support will be unwound only with extreme care, despite what feels like some premature fretting about rising core inflation pressures. Data releases on the UK housing market and the US jobs report will also be worth watching. 37-page note #Corporate client of Peel Hunt
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1 - 5 March 2021
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For our 4S coverage, we have compiled a chart book to help investors identify companies whose share price performance has diverged from the main factors that influence the stock. Below, we highlight our six key picks, Costain, Gateley, PayPoint, Serco, Speedy Hire and SThree, where there are favourable tailwinds that, we argue, are not fully reflected in their share prices.
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Click here to see the note Key Stocks Clinigen (Hold, TP 820p): Less generics pressure should provide impetus for an upgrade to FY21 guidance Genus (Buy, TP 4750p): Exceptionally strong H1 Hikma Pharmaceuticals (Hold, TP 2640p): Formal FY21E outlook and timeline for generic Advair restart will be key Inchcape (Buy, TP 750p): momentum building Serco (Buy, TP 162p): Resilient, cash generative business Vistry (Buy, TP 1265p): Trading remains robust Stocks Previewed 4imprint#, Aggreko, Anpario#, Ascential, Ashtead, Bakkavor#, Bellway, Breedon, Bunzl, Capital & Regional, Chemring, Clinigen, Coats#, ConvaTec, CVS, Devro, Direct Line, dotdigital, Essentra#, Eurocell#, Ferguson, Forterra, Foxtons, Galliford Try#, Genus#, Gooch & Housego, Grafton, Henry Boot#, Hikma Pharmaceuticals, Hiscox, Howden Joinery, Ibstock#, Inchcape, International Consolidated Airlines Group, International Personal Finance#, James Fisher, John Laing Group, Jupiter Fund Management, Keller#, Luceco, Marshalls#, McBride#, Morgan Sindall, Ocean Wilsons#, Persimmon, Polypipe, Rathbone Brothers#, Reach, Rentokil Initial, Ricardo, Savills, Serco, Signature Aviation, Springfield Properties, Strix, STV#, Taylor Wimpey, Town Centre Securities#, Travis Perkins, Vistry#, Vitec, Volution, XP Power Macro highlights Today’s UK data releases illustrated the contrast between the historic readings and the forward-looking indicators. Retail sales predictably slumped in January, as the impact of the latest lockdown hit clothing and department stores especially hard. Yet February’s flash PMIs featured a jump in the services sector index and the strongest business optimism reading for close to seven years. UK investor sentiment next week will likely be governed by the PM’s update on Monday rather than any of the data points, although Tuesday’s labour market report will be of interest, as ever. Elsewhere, Fed Chair Powell will update the US Congress with his latest thoughts on monetary policy, against a backdrop of steadily climbing US Treasury yields. 32-page note #Corporate client of Peel Hunt
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EPCs (Energy Performance Certificates) lodged for new-builds can provide a useful lead indicator for building completions. YTD, 26k EPCs have been lodged, 1% ahead of 2020 and significantly ahead of 2019. To us, this suggests the housebuilders have entered the year with good momentum and stock levels are holding up. We expect continued progress as comps ease in March and April. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 29-page note
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday 11 February 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 23-page note
Mortgage approvals in December were 104k, 54% above the previous year. Overall, mortgage approvals in 2020 ended the year 4% above 2019, an unthinkable situation in June, when cumualtive approvals were down 32%. The clear implication is that housing transactions should remain extremely strong in the first quarter of 2021, though their trajectory thereafter will depend on the rate at which the pipeline is refilled. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 29-page note
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday 28 January 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 23-page note
Housing RMI spending continues to recover rapidly, as consumers divert travel and leisure spending into the home. Private RMI spending in 4Q last year was 8% higher than in 2019, suggesting the boom was not merely confined to the summer months, and that we should expect to see a continuation of this trend through the current lockdown and into the rest of 2021. We remain bullish on the sector. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 29-page note
The probability of home improvement demand continuing at elevated levels over the next 12 months are virtually zero, in our view. In December 2017, we argued in Calling all contrarians that UK residential RMI (Repair/Maintenance/Improvement) demand would at some point start to beat expectations and this has happened in dramatic fashion over the last 6 months. We now caution on extrapolating this growth for much longer than a few months, in particular since we expect disposable household income to soon be diverted back to travel and leisure spending. However, the likely pullback in share prices could, in our view, present a buying opportunity in quality names such as Howden and Epwin.
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A less Covid afflicted world in 2021 A Brexit Deal, $900bn US stimulus, and now a Democrat controlled Congress, explain how Global Equities have been propelled to new highs. Hereon the focus should shift back to COVID. If the vaccine roll-outs are effective, we see upside risks to yields and EPS estimates. We share more detail in our 2021 Outlook presentation. Economic recovery still expected after a Q1 dip Tighter and longer restrictions to fight Covid-19, including school closures, represent another downside risk to short term growth in major developed economies. Nevertheless, policy support is still being ramped up and provided that the vaccination process is effective, a stronger than expected rebound should follow from Q2, extending into 2022. Who came out on top in 2020? The Deep Value, Key Ideas and UK High Conviction lists performed well in 2020, beating their respective benchmarks by at least 8% across the board, with Deep Value and UK High Conviction lists ending with a strong Q4 in particular as a result of the shift to Value names and positive Brexit outcome. Emerging Consumer and MandA lists were roughly in line with benchmarks during the year. Moving our lists from 2020 to 2021 We keep a strong exposure to a continued cyclical recovery. In our view, this will remain the largest driver of performance in the near term, as upside risk to rates and EPS estimates should drive a strong Value and Cyclicals rally. For this reason we do not change the core holdings in our lists but we do add Basic Resources and Banks to our Key Ideas and UK High Conviction lists. Changes to the lists: Deep Value List: OUT - ArcelorMittal Key Ideas: IN - ArcelorMittal, Credit Suisse; OUT - Kerry Group UK High Conviction: IN - Anglo American; OUT - Pennon
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 7 January 2021. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 23-page note
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Analyst Best Ideas, Oxford Biomedica, Mitchells & Butlers, Clarkson, Tyman, Premier Miton, SMID Market Highlights
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Liberum's research coverage encompasses more than 340 stocks across 12 pillars. Each quarter we ask our sector teams to list their most and least preferred stocks on a six to 12-month time horizon.
Time for value to take centre stage? Value stocks have struggled against companies deemed to be higher quality and those delivering more rapid growth, particularly over the last 4-5 years. However, there has been some rotation back into value-orientated companies in the last few months. There are signs that this trend is continuing in large cap stocks in early 2021. Our analysts have selected 31 top value stocks across 14 sectors, with an average market cap of c.£560m. Ten names are repeated from last year. The average CY21E PE is 13x, dropping to 9.9x in CY22E. Charles.Hall@peelhunt.com, Clyde.Lewis@peelhunt.com 35-page note
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Today's news & views, plus announcements from AUTO, INF, AGK, GRG, SONG, IPO, PHP, TPK, CLG, LOOK
Travis Perkins plc Primary Health Properties PLC
We have revisited our estimates to reflect recent news that Wickes and Toolstation would be returning furlough and rates holiday receipts. This leads us to lower our 2020E EPS estimate by around 19%. We also take this opportunity to nudge up our 2021E estimate by 3% as momentum in Wickes and Toolstation has ended the year strongly and as Merchanting is holding on to around 40% of lost sales from closed branches. The shares look attractive on stand-alone valuation, as a play on the continuing strength of home improvement and as its own initiatives should create value.
Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 17 December 2020. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 23-page note
A renovation shift The past couple of months have seen a slew of upgrades across the sector as trading conditions continue to improve. We expect this to continue in 2021, especially in the RMI sector, and are increasingly optimistic that sector volumes in FY22 will return to the levels seen in FY19. While we have made limited changes to our FY21 numbers, the increased optimism about FY22 results in average earnings upgrades of 8% across the sector, which could well be supplemented by increased M&A activity. We make no changes to recommendations, but increase our target prices by 11% on average as we look to FY22 and our upgraded numbers. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 34-page note
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Today's news & views, plus announcements from RIO, AVV, BNZL, TPK, ASCL, DC, PMO, SDRY, SHED, YEW, CNC
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Strong Autumn trading, repayment of furlough monies This morning’s unscheduled trading update indicated that trading continues to recover, led by exceptionally strong growth in the DIY segment. The better trading and excellent balance sheet position has given the group the confidence to do ‘the right thing’ and return both the business rates relief and furlough monies associated with Wickes and Toolstation, which totals c.£50m. While this will reduce FY20’s EBITA by a corresponding amount, we believe it demonstrates the group’s confidence in both the outlook and balance sheet. The shares trade on c.15x CY21 consensus earnings, falling to c.13x CY22. Sam.Cullen@peelhunt.com, Clyde.Lewis@peelhunt.com
Healthcare podcast, SAS - The Invincibles, Mining: China data, Hollywood Bowl, Real estate data, Yew Grove REIT, Market Highlights
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Healthcare podcast, SAS - The Invincibles, Hollywood Bowl, Real estate data, Yew Grove REIT, SMID Market Highlights
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In these short videos Joe Brent, Sanjay Vidyarthi, Charlie Campbell and James Allen discuss the recent research publication of the 4S's: Support Services & Special Situations - Out of the ashes, with each analyst's stock recommendations.
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Please click on the link for our latest Performance & Valuation Summary for our coverage of the housebuilders, estate agents, builders merchants and building materials companies. Pricing is at the close on Thursday, 3 December 2020. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com 23-page note
While the pandemic continues to weigh on construction markets, we do see reasons for optimism: 1) the US Eldorado; 2) EU renovation stimulus programmes; 3) pricing power across value-added solutions; and 4) surge in MandA activity. The 2021 lightside playbook As we approach the end of this anomalous year, we cast our sights to 2021, where three major themes could come into play: 1) the US to be an Eldorado, 2) the renovation wave, 3) MandA spree. Buy US Eldorado names = FERG and OC Leading indicators have hardly ever looked as bright, leaving the US new-housing and RMI sector poised to reach record-high levels in 2021 and support pricing power in-turn. OC is our top-pick to play US housing. Ferguson also screens well - we upgrade to Outperform. Buy EU renovation and turnaround stories = SGO, GEBN, TPK The market still has doubts on trade ideas to play the EU renovation wave. We agree it won''t be a linear trajectory but fiscal stimulus programmes are secured and delivering incremental growth opportunities across Europe. Saint-Gobain, Geberit and Travis Perkins are best positioned in our view. Buy MandA initiators = KSP, SIKA After a quiet year on the MandA front, the sector could unleash its deep-pockets and EUR20bn of firepower, particularly across renovation end-markets and valued-added solutions. Sika and Kingspan (raised to +) are likely to drive this theme. Be on your guard with Europe new-residential market = IBST, FORT, WIE The impact of the pandemic is still unknown with lockdown 2.0 likely to further weaken housing permits. Brick names have rerated on vaccine hopes and prospects of Brexit risk easing; we take profit and downgrade IBST and FORT to Neutral.
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4S's Book – Out of the ashes, Fair Oaks Income - Initiation, Highlighting Consumer Value, Copper remain six-year highs, New energy snippets, Mitchells & Butlers, Market Highlights
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As Lenin said, ‘There are decades where nothing happens; and there are weeks where decades happen’. So much has happened in the last six months, including a pandemic and global recession. This has resulted in depressed growth, downgrades, debt and dilution. Not a single company in our coverage has achieved consensus upgrades over the last year. However, they have sought to protect balance sheets by taking government help, cutting dividends and raising money. All have survived. Three vaccines, a new US President-elect and cheap money are driving reflation. There have been some recent upgrades but most companies are not giving guidance. Share prices are not hanging around to know the full answer and shorts are getting squeezed. Most company share prices have already reached a positive inflection, with an increased investor appetite for risk. We continue to believe in The Golden Age of Infrastructure, particularly in the UK where the government seeks to ‘level up the North’ and ‘build back better’. While government debt is clearly elevated, there is no appetite for taking away the punch bowl for a while yet. The Spending Review and National Infrastructure Strategy are supportive. There is no single valuation approach to picking the winners, but our preference is still EBITDAC, where we look at EBITDA in CY19, before COVID, and in CY23, when the economic effects of the pandemic will have largely flushed through. Our key buys are Calisen, Costain, Gateley, PayPoint, Serco, Speedy Hire, SThree and Travis Perkins.
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Not quite business as usual... Biden presidency and likely Republican majority in the Senate seems to boil down to a 1) more modest stimulus than expected initially, 2) lower trade frictions, and, 3) a reduction of tail risks. At this stage, our assumption is for a stimulus of $420bn, significantly less than c.$890bn stimulus a Democrat-led Senate could push, but enough to allow for a strong recovery and c. 18% EPS growth in the US. The Chop is mostly priced in, stimulus priced out A phase 3 vaccine with a 90% efficacy is clearly a better outcome than consensus expected. Now we have seen what pricing-in a Covid vaccine can look like. Spectacular. This is one of the largest momentum moves in recent history and the question becomes how long it will last for the ''Vaccine plays''. As we noted in our post-election write-up (Supersize Me) with equities up, the USD weakness, and a reversal in the higher yields/ lower Growth stocks trade, the ''Chop'' has been priced in, and the ''Blue Wave'' priced out. We believe that the key drivers are now clearly other factors such as the COVID infections trajectory, the likelihood of a successful global vaccine roll-out, and, ultimately, on the ability for the consumer to normalise his behaviour. While new lockdowns will see growth decelerate, eventually growth recouples to fundamentals UK High Conviction and Deep Value are playing catch-up Record months for the UK High Conviction and Deep Value lists. The performance owed a fair share to a couple of star performing stocks. Both lists were boosted by the take-over offer on Kaz Minerals and its 25% share price increase. RSA in our MandA list was also offered a significant premium, 51% over its trading price pre-announcement. Bank of Ireland also saw a similar share price hike. Respectable performances were seen amongst the other lists also. Post the US election outcome we refrain from adding in green names, and instead add some ''back to work'', vaccine winners....
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Election day is here, with the polls, pundits and punters continuing to favour Biden. While the race has tightened a little, Trump still needs a polling error higher than 2016 to win. We evaluate all three key post-election scenarios: a) The Status Quo (Trump + GOP Senate); b) The Chop (Biden win + GOP Senate); and c) The Blue Wave (Biden win + Dem Senate). And 27 of our top-ranked teams have analysed how each election scenario is likely to shake out in their respective sectors. Are you ready? What to expect, and when We will probably not know the election outcome soon, unless it''s a blowout Biden win. Our timeline suggests that unless Biden wins one of the States likely to announce results overnight - Florida, Georgia, N. Carolina, Texas - we might have to wait a few days to ascertain the likely winner. ''The Status Quo'' and ''The Chop'': It''s all about the stimulus In the Status Quo, we assume stimulus of $850bn. We suspect US markets will react favourably, with a stronger dollar, EM weakness and neutral rates. The Chop is likely to see an initial negative reaction on Wall Street, as the likelihood of stimulus is lower (we assume $420bn). We see dollar weakness, EM outperformance, and modestly lower rates as the probable knee-jerk reactions. ''The Blue Wave'': Will it hit a Senate wall? Barring a blowout win, our analysis of voting histories suggests that the marginal Senate voter is likely to be centrist. This suggests sizeable stimulus ($2.3trn), and importantly, tax hikes that are less onerous than feared. We explore the mechanics of passing the stimulus given the filibuster. In a Blue Wave, we see higher yields, and value and ESG/Biden Basket outperformance. Bullish... and with fewer buts than before Following a 9% correction, the much needed sentiment reset we highlighted in Bullish...with a But has materialised. The market yields sufficient longer-term upside in all post-election scenarios. And the likelihood of positive vaccine news...
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Travis Perkins’ rebound in Q3 FY20 was slow, as the strong momentum in domestic RMI (repair, maintenance and improvement) was held back by softness in the larger new construction activity. Unfortunately, over the coming few months, the sustainability of the recovery will now again be tested by the resurgence in COVID-19 cases in the UK and uncertainties around the Brexit outcome. Hence, the sentiment around the stock is likely to remain muted, in our opinion.
PraxisIFM, Screen of the Week, Travis Perkins, Mo
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PraxisIFM, Screen of the Week, STMicroelectronics, IAG, Travis Perkins, Moneysupermarket, MJ Gleeson, Pendragon, Market Highlights
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Summary of Q320 Travis Perkins organic sales grew by +3.8% in Q320 vs. +1% consensus expectations on the back of a strong recovery, driven by buoyant DIY trends and robust RMI activity offsetting continuing pressure in new-housing and non-residential markets. Key news The group highlighted a strong pick-up of activity in September with l-f-l sales growing by +8% and higher workloads in the new-housing sector implying Q420 trends should remain in positive territory unless restrictive lockdown measures are introduced. Management now expects FY20 EBITA in the upper-half of consensus expectations (GBP222-261m), implying mid-single digit consensus upgrades. In terms of capital allocation, management mentioned that it will await the upcoming winter period and the trading conditions during this period to update the market on both its dividend policy and portfolio recycling strategy. Earnings We have integrated the faster than expected volume recovery and increased our EBITA expectations by +4% in 2020 and +2% in 2021. Rating and target price Our earnings upgrade is the main driver of our increase in target price to GBp1,445 from GBp1,415. We reiterate our Outperform rating. Investment case We believe the market is discounting near-term distress and forgetting the group''s competitive advantages coming out the other side.
Travis Perkins published its 2020 Q3 trading statement this morning for the 3-month period to end-September. Retail (Wickes/Toolstation) had an excellent quarter with LfLs driven by the strong recovery in UK residential RMI (repair/ maintenance/ improvement) demand. The Merchanting business (c50% of group revenues) fared less well with a LfL decline of 3.1%. We adjust our FY2020 forecasts to reflect management guidance of EBITA of c£250m and retain our SELL recommendation.
Shaftesbury, PayPoint, XPS Pensions Group, Town Centre Securities, Futura Medical, SMID Market Highlights
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Essity, Shaftesbury, PayPoint, XPS Pensions Group, Town Centre Securities, Futura Medical, Market Highlights
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Like-for-like sales growth turned positive in Q3 (+3.9%) after a very strong September (+8%) more than offset July and August which were slightly down on the prior year. Toolstation and Wickes have been running ahead of last year since Q2, while merchanting is recovering more slowly. We are slightly disappointed the Wickes demerger has not been re-started. Management has said it expects results for FY20 to be in the top half of consensus. We like the shares for the optionality on disposals, the improving core and still attractive valuation - 11x 2019 PER.
Better momentum in UK construction markets should drive consensus earnings upgrades The consistently cautious tone during the H120 results season of most UK construction companies on H220 trends could prove to be too pessimistic given construction markets have gained momentum, opening the door to a likely positive Q320 trading update season. Travis Perkins kicks off the season on the 22nd October. Building renovation is the Q3 season treat The RMI/DIY markets have been robust throughout the summer as indicated by the UK retail sales and read-across from the construction industry. The stamp-duty holiday, resilient housing transactions and house prices should help to support the medium-term outlook for the renovation sector. New housing activity could be the real surprise The UK''s leading housebuilders are much more optimistic on the shape of the recovery and the outlook for the housing sector than our UK brick coverage. Barratt''s strong housing completion outlook in 2021 implies consensus upgrades for Ibstock and Forterra are on the horizon. TPK: Near-term value creation from portfolio recycling? Stronger Q320 activity and improved near-term visibility could lead management to provide an update on its planned demerger of Wickes and the divestment of the PandH division, in turn leading investors to look again at the potential value creation from this strategy. UK bricks: A brighter outlook - Upgrade Forterra to Outperform Housing construction is showing signs of life again, with recent trends and industry feedback suggesting the recovery is more pronounced than expectations. Ibstock and Forterra are likely to surprise positively. Our increased volume expectations in Q320/H220 and in 2021 is the major driver of our earnings upgrades. We upgrade Forterra to Outperform on the back of a stronger UK residential outlook both near- and medium-term.
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Once a faint rumour, the EU renovation wave finally hit the shore on 14 October 2020, with the announcement of the aim of doubling the energy-saving renovation run-rate by 2030. But despite the ambitious target, both the necessary funding and a clear and tangible roadmap are missing. Can the funding and legislative provisions that are proposed at least turn the tide? An ambitious doubling of the energy-saving renovation rate to 2030... The EU renovation wave programme has set out the ambitious target of doubling the renovation run-rate by 2030, underpinned by a EUR250bn programme and a plethora of initiatives. ... but with no credible funding in place or even a near-term roadmap The programme is full of legislative proposals but lacks a credible and ambitious funding strategy, increasing the risk of poor execution, at least in the near term. The EU will only commit EUR250bn in the next 7 years vs. around EUR300bn per annum required to meet its targets. Still, there are reasons to stay positive medium-term We believe the current funding structure should at least kick-start the EU energy-saving renovation market, helping it to grow by around +35% in the next decade. We also see the minimum building performance and renewable energy targets as a strong medium-term catalyst. Riding the renovation wave to podium positions Rockwool, Travis Perkins (assuming UK alignment) and Saint-Gobain stand out, with EBIT boosts of +77%, 55% and 50% respectively to 2030 vs. 2021 levels. Our assumptions don''t take into account a likely increase in energy-solutions pricing as some industries will tighten. Closing the gap to expectactions Kingspan, Sika and Wienerberger are closing the gap to expectations for double-digit EBIT boosts to 2030 vs. 2021 levels. The near-term renovation priority being on public and private non-residential buildings could lead to higher and faster earnings growth for Kingspan.
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Focus on the presidential race and fiscal stimulus In October, the race to a vaccine continues everywhere but the market is likely to focus on stimulus hopes on both sides of the Atlantic and on the US presidential race up until November 3. In the UK, ''Brexit'' is the only word that matters outside of ''Covid''. We continue to view a pro-cyclical bias as essential for performance and we keep our exposure toward stocks that benefit from reopening economies. We remain optimistic on Brexit and adjust our domestic exposure ahead of October deadlines in our UK High Conviction and Deep Value lists. Downside risks remain The pace of the global recovery is slowing down and new restrictions in major economies to control the pandemic fuels the risk of downside surprises in the months ahead. While further catch up in the manufacturing sector is expected, additional stimulus is thus required to support the service sector. Implication for our lists Within our Key Ideas list, we add Adevinta and remove Engie. Our media analysts expect Adevinta''s key assets to drive mid-teen organic revenue over the long term. Within our UK High Conviction list we add Diageo and remove Sainsbury. We believe this ''Nifty'' name, by reducing our direct domestic exposure, should provide a better hedge to our positions that would benefit from either 1) an improvement of the pandemic in the UK; or from 2) a positive Brexit development. We also add Diageo to our Emerging Consumer list given its strong +40% exposure in the emerging markets universe. Finally, within our Deep Value list, to reflect the narrower upside potential in the near term, we remove Smurfit Kappa, Electrolux, Lagardere, IHG. Our only addition this month within the Deep Value list is Bank of Ireland. The name could benefit from significant re-rating through a de-risking of the Brexit process whilst offering sufficient protection buffer. Changes to the lists: Deep Value List: IN - Bank of Ireland; OUT...
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Liberum's research coverage encompasses more than 340 stocks across 10 pillars. Each quarter we ask our sector teams to list their most and least preferred stocks on a six to 12-month time horizon.
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It''s time for the lightside to take centre stage. We carve out coverage of 13 top US and EU names for a uniquely global and dedicated lightside coverage universe. We overhaul our end-market scenarios for over 40 countries, dive into every industry and screen for ESG and MandA, for a 360 view of the landscape. Our analysis finds more pent-up demand than consensus. We forecast a profound, long-term and transformative wave in EU renovation on the back of new regulatory dynamism, plus a potentially vintage 2021 in US new build. With many valuations at new record highs, we provide a framework for stock picking, while highlighting the key trends, notably EU renovation and a UK sector that looks overpenalised. In a separate note, Straight Flush, we launch on one of our key convictions, Geberit, with O/P.
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Support Services & Special Situations - The Outliers, Electrocomponents, Travis Perkins, Fevertree, Ricardo, Science Group, Sensyne Health, Market Highlights
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Support Services & Special Situations - The Outliers, Electrocomponents, Travis Perkins, Fevertree, Ricardo, Science Group, Sensyne Health, U+I, SMID Market Highlights
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Travis’ shares are weak since H1 results, as H1 PBT dis-appointed, H2 started unspectacularly and guidance is still absent. However, the market missed the silver linings. Cash flow was very strong in H1, with covenant net debt closing at only £22m. Trading is improving steadily, with DIY leading and trade following. Management has taken the opportunity to accelerate planned improvements, mainly restructuring the branch network. We like the shares as we see the Wickes demerger and Plumbing sale as catalysts, RMI appetite improving and valuation compelling.
Travis Perkins posted subdued H1 FY20 results as, amidst the Coronavirus-caused disruptions (mainly in Q2 FY20), all its banners except Toolstation slipped into negative territory. Worse, the impact on the adjusted operating profit was 4x vs the 20% fall in the top-line. While H2 FY20 is likely to generate much better top-line and profitability, management remains cautious about the demand for building materials in the near term, amidst the uncertain macro-environment conditions and expectations of higher unemployment in the country.
For our 4S coverage, we have compiled a chart book to help investors identify companies for which the share price performance diverges from the main factors that influence the stock. To help us identify these opportunities, we have created a composite index, or basket, for each company.
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Screen of the Week - Brexit, New Energy, Luceco, DP Eurasia, SMID Market Highlights
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Screen of the Week - Brexit, New Energy, Luceco, DP Eurasia, Market Highlights
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Management and analysts are now getting to grips with post-lockdown trading. We have revised our forecasts for Breedon, Howden and Travis Perkins in light of recent interims and trading updates. We note that, for the time being at least, management guidance remains withdrawn in all three cases and therefore accept that our forecasts carry an elevated degree of risk.
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Ascential, Naked Wines, Card Factory, Mitie, Ricardo, Market Highlights
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Ascential, Naked Wines, Card Factory, Mitie, Ricardo, SMID Market Highlights
Today we re-instate our financial forecasts and recommendations for five stocks in the building materials sector. We suspended our numbers in March, in response to management teams withdrawing financial guidance amid huge economic uncertainties caused by COVID lockdown. We note that management guidance remains withdrawn in all five cases, however we think we now have enough data and information to tentatively model out to FY2022, whilst accepting that forecasts carry an elevated degree of risk.
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The Chancellor’s summer statement is a welcome boost to companies in our coverage universe. The Stamp Duty holiday will not only help housebuilders, but merchants too, whose volumes are highly correlated with transactions. The well trailed housing improvement grant scheme will help insulation suppliers and window makers. We are also encouraged by the repeated infrastructure commitment as well as the public sector decarbonisation programme.
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Sharp rebound, new risks The data released in June confirms a sharper-than-expected rebound in activity following the ''Great Lockdown''. New risks are, however, emerging and are becoming visible in the high frequency data in the US. The rise in Covid cases in the US and large EM countries may slow the recovery in the coming months. In July, we will watch for possible announcements in the US, the UK and France, and progress on the EU Recovery Fund. Looking further ahead, if more social distancing is required, economic data could start to disappoint in the US this autumn. Our risk appetite indicator, the OGRI, remained in negative territory in June despite the recent rally in risk assets. Cyclicality over Value STOXX 600 has risen 5.3% since end-May and outperformed US equities. Over the period, the Value factor outperformed Growth and Quality by respectively 93 and 215 bps. More strikingly, Cyclicals have outperformed defensives by 5.1%. The key drivers of this cyclical rebound - policy and sequential improvement in macro data - remain strong but we can see real tactical challenges emerging as the market eyes towards a complicated H2. In this setup, a preference for the most resilient businesses should be more pronounced. In spite of a continued rebound, this preference could limit the prospect of a large value rally in the near term. In term of portfolio implications, we aim to mitigate some of the build-up in volatility that could emerge. Our Key Ideas leads the way Our flagship list, Key Ideas, had a strong performance in June, beating the benchmark by more than 2%, for a third straight month of good performance. The Emerging Consumer list also had a strong month. We do not make changes to either list this month. However as we monitor risk appetite, we bring more exposure to Quality within our lists. In particular, we replace Societe Generale with Credit Agricole in our Deep value list and opt for LSE and Travis Perkins instead of...
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The lightside sector has rallied c.30% in the last three months on EU and US fiscal stimulus, EU renovation policy announcements and signs of a faster-than-expected recovery post COVID-19. Despite some relief, Q220 is likely to be one of the worst quarters on record in recent decades. We see an opportunity to buy cheap stocks where our H2 bridges suggest upside risk to full-year consensus. Top picks are SGO (+) and WIE (+) in Europe and OC (+) and AWI (= to +) in the US. Q220 likely to be a bouncy ride but the outlook is clearing We expect Q220 EBITDA in the lightside sector to decline by -45% led by a fall in volumes, disproportionate operational leverage and the timing of cost-saving measures. The UK brick industry is expected to be hit the hardest. We downgrade Ibstock to Neutral. For others, we think investors are likely to overlook Q2 disappointments and focus on winners in a recovery in H220. SGO (+) a much faster-than-expected recovery The group''s recent market update suggests the pace of recovery has been faster and stronger than expected. The current run-rate implies the group could experience a more positive H220. We also see the EU renovation wave (adoption in Q320) as a clear catalyst for the shares near-term. WIE (+) guidance upgrade lurking ahead? The group FY20 guidance seems overly cautious, implying a double-digit volume decline in H220. Assuming the recent recovery in Europe and the US continues in the summer, we believe management is likely to upgrade its guidance. US lightside: Preference for US residential and cash-cow end-markets The US residential market was expected to grow double-digits in FY20 pre COVID-19 disruption. With limited lockdown measures and a large backlog of homes to complete, Owens-Corning (+) stands to benefit most from a potential housing recovery in H220, and could beat Q2 ests. AWI''s (= to +) c.40% underperformance vs the rest of the sector seems too harsh given the group''s best-in-class...
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Loungers, Renew Holdings, Ted Baker, Travis Perkins, Costain
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Travis Perkins’ revenues are recovering faster than we initially expected. The group has also announced that cash generation in recent months has been very strong, with cash balances rising £241m over the last seven weeks. Management also announced cost savings which will reconfigure the group for the expected short-medium term outlook.
The 4S's - Navigating the COVID crisis, Calisen Initiation, SAS - SMID Monthly, ECI, Young & Co., On the Beach,
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The 4S's - Navigating the COVID crisis, Calisen Initiation, SAS - Monthly, ECI, Young & Co., On the Beach, Volution, Strategy Flash
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We explore the impact of COVID-19 on earnings and balance sheets. After a monstrous April, there are encouraging signs that life at the coal face is getting easier.
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Building Materials & Equipment Hire; Sector Comme
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Building Materials & Equipment Hire; Sector Comment, Harworth, Great Potland Estates, ASML, STM, Lufthansa, Whitbread, easyJet, Assura, Integrafin, Pets at Home, Motorpoint, Pendragon, SiS, Market Highlights
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Online search activity for houses for sale appears to be picking up, with activity now on a par with pre-lockdown levels. We recognise that it is still early, and that the true test of the housing market will come once the economy starts to weaken markedly, but for now we point out that this sign of resilient appetite is encouraging.
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We look for opportunities within our Building Materials and Equipment Hire universe after the shares have fallen by 13-69%. We find that all companies have enough facilities and covenant headroom to get through to the other side of the crisis, except SIG and HSS, our least preferred stocks.
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In the 1992 film ‘Reservoir Dogs’, Lawrence Tierney’s character barked “Let’s go to work” to get the gang moving. Based on an anticipated revival in construction activity, we think there is clear light at the end of the Covid tunnel for the building materials sector, and that from next month, revenues will gradually begin to recover. We see infrastructure as a logical choice for first phase release of lockdown measures but think building materials geared to consumer end-demand will take longer to recover. We also believe that equity capital will eventually need to be raised by the most leveraged companies.
Travis Perkins plc Breedon Group PLC
While Travis Perkins sustained positive momentum in the majority of Q1 FY20, Coronavirus infected its final two weeks’ performance. In Q2 FY20, business activity will deteriorate judging by the c.66% revenue decline in the first three weeks of April. As the Brexit-related uncertainty and economic recession are likely to prevail in rest of the year, the cost-cutting and cash-preserving actions act as saviours.
Oxford Biomedica, Plus500, XPS Pensions Group, Ricardo, SMID Market Highlights
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Oxford Biomedica, Plus500, XPS Pensions Group, Ricardo, Novartis, Bayer, Market Highlights
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“Only when the tide goes out do we see who has been swimming naked” (W. Buffett). The Covid-19 economic tsunami has exposed business models that may struggle to survive unless fresh equity is raised, and in this note we look at balance sheet risk across the sector. We also check dividend coverage levels to see where the axe on income payments may fall over the coming 12 months if earnings recede, as now widely anticipated.
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Liberum's most insightful and high-value research and commentary published this past week.
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ECI - China: Where Next?, GoCo, Financial Services Opportunities, Dealspotting - Consumer Disc., Travis Perkins, Volution, Robert Walters, Intu
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ECI - China: Where Next?, GoCo, Financial Services Opportunities, Ontex Group, Dealspotting - Consumer Disc., Umicore, Travis Perkins, Volution, Robert Walters, Intu
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A good year ends for Travis Perkins – the healthy FY19 top-line performance, combined with cost savings led to a profitability improvement during the period. However, management has maintained the cautious outlook for FY20, as the macro-economic uncertainties in the UK are far from over yet. Nevertheless, the Wickes demerger plan remains on track for Q2 FY20.
Travis Perkins FY results came in ahead of our expectations, with all four divisions showing progress. The main highlight was that the merchanting businesses grew its market share, showing clear outperformance against Grafton in 2019.
The UK has faced substantial headwinds in 2020 so far; with the easing of the Boris bounce, the outbreak of the coronavirus and concerns over Brexit negotiations regaining focus, large and mid cap stocks have starkly de-rated over the last few weeks (Fig 1). Substantial capital flows into the UK however have helped to carry the FTSE Small Cap higher in 2020 (Fig 3), helping the Small Cap discount fall from levels last seen post the 2008/09 financial crisis (Fig 4).
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For our coverage we have compiled a chart book to help investors identify companies for which the share price performance diverges from the main factors that influence the stock. To help us identify these opportunities, we have created a composite index, or basket, for each company.
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The Wickes Capital Markets Day produced three read across themes for the building materials sector, in our view. We see opportunities for RMI plays (e.g. Marshalls and Epwin) to distribute more branded products via Wickes. We also examine the differences between Wickes and Howdens strategy for fitted kitchens and highlight the latter’s sustainable competitive advantages.
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Our Hot Off The Wires daily newsletter takes a look at the morning's market movements, news stories and company announcements. Don't forget to have a go at our daily trivia! Companies mentioned in this edition include: Vodafone, Brewin Dolphin, Energean Oil & Gas, FDM Group, Fresnillo, Henderson Smaller Companies Trust, Quilter, Sanne Group, *Travis Perkins/Wickes, Wizz Air and Pendragon. If you would like to be subscribed, please email us at info@capitalaccessgroup.co.uk. *Capital Access represents Travis Perkins/Wickes - if you would like more information or access to the Management team of this company, please get in touch.
Building Materials In-Depth, Harworth. Mears Group, Joules, Sensyne Health
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It is harder to find value in the sector after a year of strong performance and a rather dull outlook for economic growth. However, valuations are not stretched across the board and there is a chance of strengthening activity in a few bright spots: we highlight UK RMI (repair, maintenance and improvement), UK infrastructure and the US residential segment.
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The week's most insightful research and ideas. Liberum's most insightful and high-value research and commentary published this past week.
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Our annual strategy review takes a look at what investment strategies worked and what didn’t last year. We offer index and sector valuations as of year-end.
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UK Small & Mid Cap Dispatches: Analyst Best Ideas, Quilter, Safestore, Harworth, McColl's Retail
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Analyst Best Ideas, Quilter, Safestore, Harworth, McColl's Retail
Our Hot Off The Wires daily newsletter takes a look at the morning's market movements, news stories and company announcements. Don't forget to have a go at our daily trivia! Companies mentioned in this edition include: Ashtead, Travis Perkins, Watches of Switzerland, JD Wetherspoon, S&U, McColl's Retail, Hipgnosis Songs Fund, Ted Baker, Premier Foods and OnTheMarket. If you would like to be subscribed, please email us at info@capitalaccessgroup.co.uk.
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The 4S's, Strategy Update, Codemasters, Appreciate Group CEO Video, SMID Market Highlights
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The 4S's, Strategy Update, Codemasters, Appreciate Group CEO Video, Market Highlights
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The UK election on 12th December could result in a Conservative majority, a Corbyn government or something in between. Voters cannot claim a lack of choice, with the Conservative manifesto offering One Nation Conservatism and Labour offering to ‘rewrite the rules of the economy’.
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Travis Perkins maintained the strong momentum in Q3 FY19 – all continuing businesses, especially Toolstation and Retail, contributed to the top-line. Although, management sounded cautious about the near-term outlook, it expects the full-year performance to remain in line with expectations. Progress with the Wickes demerger is on-track, but the disposal of the P&H business has been paused amidst the uncertain macro-economic environment.
Podcast - Investment Platforms, Novartis, Just Eat, Sensyne Health
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Podcast - Investment Platforms, Sensyne Health, Travis Perkins, On The Beach, Oxford Biomedica, Pendragon, Sylvania Platinum
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We have obtained clarity regarding Travis Perkins’ plan to demerge Wickes, the key takeaway being that the business will be spun-off as a publically-traded company by June 2020. While it remains to be seen if the separately-listed retail business would revive / perform better over time, the enhanced focus on trade-customers is likely to benefit Travis Perkins’ shareholders in the mid-term.
A strong Q2 19 performance by Travis Perkins was led by the improved business performance of Retail business and continued robust momentum at Toolstation. However, amidst the mixed key leading indicators of the UK builder’s merchanting and home improvement market, management maintained a cautious outlook for short-term demand. The demerger of Wickes was also announced. No material changes in our financial estimates.
Due to a change in Analyst role, Cenkos Securities plc has suspended coverage of the following stocks (see table 1). Our previous recommendation and forecasts can no longer be relied upon.
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GetBusy CEO Video, Capital Goods vs Semiconductors Video, L'Oreal, Infineon, Next, Umicore, Air France KLM, BBA Aviation, Ontex, Keywords, Mitie Group, 4imprint Group, Serco, Market Highlights
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Staffline Group, Distributors Update, Hays, Harworth, Urban Exposure, SMID Market Highlights
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Babcock, AEW UK REIT, Ceres Power, Lookers, DP Eurasia, SMID Market Highlights
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Babcock, AEW UK REIT, Semiconductors Update, WPP, Ceres Power, Lookers, DP Eurasia, Market Highlights
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Ceres Power Initiation, Futura Medical CEO Video, Millennial Lithium CEO Video, AFH Financial, Costain, PayPoint, Travis Perkins, Unite Group, Superdry, SMID Market Highlights
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Ceres Power Initiation, Futura Medical CEO Video, Millennial Lithium CEO Video, AFH Financial, Costain, PayPoint, Travis Perkins, Unite Group, Superdry, Market Highlights
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We have taken this opportunity to revise our estimates as we move onto the IFRS 16 basis. We have done this ahead of H1 results as the company has provided the market with sufficient divisional information to rework the model fully.
Support Services - The 4 S's Video, Asiamet Resources, Futura Medical, Berkeley, CapCo, SMID Market Highlights
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Support Services - The 4 S's Video, Origin Enterprises, Asiamet Resources, Futura Medical, Nokia, Whitbread, Berkeley, CapCo, Market Highlights
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In these three short videos, Support Services & Special Situations Analyst, Joe Brent, discusses the in depth research piece - The 4 S’s: Support Services & Special Situations Diamonds in the rough. With a particular focus on the big themes, which stocks have been performing and stock recommendations.
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UK construction demand remains mixed with longer-term commercial investment projects hampered by Brexit uncertainty and, despite a commitment to end public spending austerity, the delay in civil works as central government time is diverted to Brexit negotiation/debate and, latterly, the selection of a new Prime Minister. Residential RMI (Repair, Maintenance, Improvement) demand remains, on the whole, anaemic but this disguises pockets of growth such as domestic landscaping, which explains much of our positive EPS revisions for Marshalls over the last 12 months. We think that a gradual increase in real earnings growth from mid-2019, as forecast by the Office of Budget Responsibility (OBR), and a potential recovery in consumer confidence post an orderly Brexit (or post remaining in the EU!) could catalyse a revival in the RMI sector. This would be positive for the EPS revisions of small companies such as Epwin and Michelmersh, both of which derive 50%+ of revenues from residential RMI demand. The residential new build sector continues to expand with the demand for new housing, in our view, underpinned by the government’s Help to Buy incentive scheme.
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Support Services - The 4 S's, DMGT, Galliford Try, CapCo, Spirent, Lookers, Equiniti, SMID Market Highlights
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Support Services - The 4 S's, Outdoor Agencies Video, DMGT, Galliford Try, Mining Update, CapCo, Spirent, Lookers, Equiniti, Market Highlights
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Despite a solid start to the year (7.3% lfl sales growth), Travis Perkins has left investors guessing by not upgrading its full-year guidance of stable operating profit. Management has opted to wait for at least one more quarter, considering the macro-economic uncertainties in the UK. While we have improved the FY19 top-line growth estimate (following a strong Q1 performance), this momentum is not sustainable for the rest of the year. Our stock recommendation is likely to be maintained.
Travis Perkins has reported a strong start to the year with like-for-like sales growth of +7.3%, helped by an easy comparison against a wet and cold start to 2018. Merchants achieved growth of 11%, with core merchanting seeing some early benefit of improved service levels.
Smart Metering Systems Initiation, Tyman, Morgan Sindall Group, SolGold, Vertu Motors, Science in Sport, Elegant Hotels, SMID Market Highlights
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Smart Metering Systems Initiation, Consumer Staples Weekly, Tyman, Morgan Sindall Group, SolGold, Vertu Motors, Science in Sport, Elegant Hotels, Market Highlights
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Consumer Discretionary Red Flags, Mears Group, Mitie Group, Travis Perkins, Arcadia, SMID Market Highlights
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Consumer Discretionary Red Flags, Mears Group, Mitie Group, Roche, AstraZeneca, Travis Perkins, Arcadia, Market Highlights
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Travis Perkins ended the FY18 on a strong note. While all businesses clocked strong lfl sales growth, the key highlight was the return of Wickes (DIY banner) into positive territory. Management has guided for a stable FY19 operating profit, despite the expected higher inflationary cost pressures. We will revise our estimates upwards.
Travis Perkins’ FY results came in ahead of expectations, with PBT up 1%, 7% better than expected. The beat was driven by better than expected interest as well as an improved contribution from Consumer after a strong fourth quarter.
Hotel Chocolat, Babcock, Derwent London, Town Centre Securities, Air Partner, SMID Market Highlights
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Consumer Staples Weekly, ITV, Hotel Chocolat, Babcock, Mining Update, Derwent London, Town Centre Securities, Air Partner, Market Highlights
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Travis Perkins conducted its Capital Markets Day last week. Although management remains confident about the company’s long-term growth fundamentals (led by the continued housing shortage in the UK and underinvestment in maintenance of ageing house stock), it sees some challenges in the short term. Put in context, the business has become quite complicated over the past few years, as the group’s expenses (driven by investments to grow the business) increased ahead of revenue in some areas. While some businesses (e.g. Contracts and Toolstation) have consistently performed well during the period, the company has been struggling in domains like Wickes, General Merchanting, etc. Even though some of this slump has been attributable to external factors (e.g. the slump in RMI activity post the Brexit referendum, formation of buying groups have made independent players more competitive vs national entities like Travis Perkins), the internal challenges have also contributed to the increased complexity / slower decision making / margin pressure / inadequate return of capital employed, etc. THe following are the key remedial measures announced in this regard: 1. Focus on trade customers 2. Divest the Plumbing & Heating division 3. Improve the performance of Wickes’ business before reviewing other options in the medium term 4. Generate annual cost savings of £20-30m by simplifying the group business and reducing branch and distribution cost bases. Moreover, management expects the group’s FCF to strengthen over the medium term, driven by improved earnings and lower capital expenditure.
Travis Perkins' strategic update at today’s Capital Markets Day says that it will sell the Plumbing & Heating division and seek to revitalise profit growth in General Merchanting by streamlining management layers to save £20- 30m per annum, while also empowering branch managers to enable better market share momentum. The cost savings should enable profit progress even in a dull market, while the successful sale of Plumbing & Heating (perhaps for £400-500m) should mean that capital can be recycled into more profitable businesses. The shares look cheap on a FCF yield of over 10%, especially as management is aiming to drive free cash flow by improving returns and now that capex has likely peaked.
The company posted good Q3 numbers, especially in the three merchanting businesses. However, the strong lfl momentum is likely to soften in FY19, especially in Contracts and P&H segments. All eyes are now set on 4 December 2018, the Capital Markets Day of Travis Perkins. A convincing performance turnaround plan would be the next key growth trigger in our opinion. Hence, we maintain the stock recommendation, despite the stock’s valuation being very attractive at current levels.
Travis Perkins has reported Q3 like-for-like sales growth of 4%, in line with expectations and the growth achieved in H1. As in H1, the three merchanting divisions achieved good growth (+7% l-f-l) with Group progress held back by Consumer (-4%). Management is confident that revenues and progress on cost reduction should ensure that consensus expectations for the full year are met, and also notes a degree of moderation in pricing pressure in Wickes. The shares are extremely unloved here and look very cheap, on 5.5X ev/ebitda 2019E. The shares are likely to perform better in advance of the CMD on 4 December.
In a bid to leave full-year estimates unchanged, management will often cite a higher H2 weighting after a miss at the interims. Conversely, we often see prudence after a strong H1, with analysts reluctant to upgrade numbers. The ‘anchoring’ around the full-year estimates can lead to companies facing either mountains or molehills in H2. Last year, Rotork and Rightmove were identified prior to warning and beating, respectively, (PDF). In this screen we search for further possible ‘warners’ – both positive and negative – focussing on 2018E H2 EPS weightings vs. their five-year median. AB InBev and Spirent Communications face tougher H2s than usual but are rated Buy by Liberum. Conversely, IAG, Publicis and Travis Perkins look well-placed to exceed full-year expectations.
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In a bid to leave full-year estimates unchanged, management will often cite a higher H2 weighting after a miss at the interims. Conversely, we often see prudence after a strong H1, with analysts reluctant to upgrade numbers. The ‘anchoring’ around the full-year estimates can lead to companies facing either mountains or molehills in H2. Last year, Rotork and Rightmove were identified prior to warning and beating, respectively, (PDF). In this screen we search for possible ‘warners’ - both positive and negative - focussing on 2018E H2 EPS weightings vs. their five-year median. SIG and Spirent Communications face tougher H2s than usual yet Liberum analysts rate both highly. Conversely, Domino's Pizza, Page Group and Travis Perkins look well-placed to exceed full-year expectations.
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Travis Perkins’ shares are oversold, never more unloved and highly undervalued. The night is likely to prove darkest before dawn as cost savings improve H2 results in General Merchanting and Consumer; Plumbing & Heating recovery continues; and, Contracts’ growth resumes. The shares offer compelling value here, especially the 10% FCF yield. We maintain our Buy rating and see over 30% TSR upside to our unchanged target price of 1525p.
Travis Perkins has reported poor H1 FY18 results. Although the top-line grew strongly (+4.2% lfl growth; 5.9% in Q2 FY18), the group’s profitability came in below our as well as the street’s estimates. Group adjusted operating profit excluding property profits slumped c.12% in the period. The downfall was largely attributable to the sales mix, weaker K&B showroom sales in Wickes and higher operating costs in the General Merchanting business. The company has charged £246m goodwill impairment for the business. Management expects challenging market conditions to persist and anticipates FY18 EBITA to come in at the lower range of analysts’ expectations (£360–390m). Also, it has commenced a comprehensive review of the Wickes business and will share details at the CMD in early December.
Travis Perkins has reported H1 PBT down 5% to £167m (Lib E £169m), with revenue up 4% (4% l-f-l, Lib E 3%), and operating margin down from 5.9% to 5.3% as overheads rose in support of business development and gross margin slipped due to mix in Plumbing & Heating and less kitchens at Wickes. Although results looked close to estimates, property profits of £17m were around £10m up on last year. Profits were broadly as expected in the trade divisions, but Wickes had another weak half with EBIT down 36% to £29m, with weakness in kitchens and bathrooms again. Management is guiding down estimates to the lower end of the range of expectations, which should mean consensus PBT falling around 4%. The shares look very good value on a FCF yield of around 9%, but the surprising weakness in Wickes is likely to depress the shares until profitability stabilises.
Travis Perkins’ Q1 sales growth was a little better than expected at +3.0% compared to our estimate of +1.8%. The General Merchanting and Contracts divisions were broadly flat as expected, impacted by weather, while Consumer was considerably worse than expected and Plumbing & Heating much better. Management is confident of achieving expectations in 2018 and has signalled a determination to adjust costs further if necessary to achieve this. We see a compelling case for the contrarian here with over 20% TSR upside, driven by cheap valuation on 11x PER and 9% FCF yield.
Three of the biggest sector constituents are expected to report next week. We expect Persimmon and Taylor Wimpey to report resilient sales rates, maintaining the momentum seen at the start of the year. The first-time buyer remains highly motivated and active as it is still cheaper to buy than to rent, especially with Help to Buy. Housebuilders' performance should improve as weak sentiment is surprised by the continued resilience of trading, combined with unstretched valuations – we prefer the smaller housebuilders. We expect Travis Perkins’ Q1 like-for-likes to be impacted by weather, but full year estimates should still be achievable, making this a compelling stock for contrarians.
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Travis Perkins’ shares are at five year lows and analyst sentiment is very depressed. We think the shares’ valuation is now highly attractive and can see a compelling investment case for the contrarian. Disappointments in the results should unwind fast and highlights were overlooked. The outlook is stable not catastrophic and might actually brighten as real wage inflation turns positive again. We see over 20% upside to our revised target price of 1525p.
Travis Perkins clocked strong lfl revenue growth in Q3. The Merchanting business (General Merchanting, P&H and Contracts segment) was up 4.7% yoy, led by strong growth momentum in Contracts. However, the consumer business slowed due to a subdued performance in Wickes. The ongoing momentum in Merchanting is likely to last for a few more quarters, but macro-economic headwinds (tighter credit availability + negative real wages) should soften the growth gradually. No change in our stock recommendation.
Travis Perkins ‘TP’ reported better lfl revenue growth (2.7% vs our estimate: 1.5%) in Q2 FY17, on the back of a strong performance in Contracts (+6.4% yoy; contributed c.21% to group revenue) and Consumer divisions (+6.5% yoy; contributed c.25% to group revenue). The growth was largely driven by improved customer propositions and the benefit of recent investment in the business. The General Merchanting ‘GM’ division was up marginally (0.3% yoy; contributed c.33% to group revenue), impacted by the company’s trading stance of preserving profit margins by passing on input cost inflation. The Plumbing & Heating (P&H) division remained in the red (-1.9% yoy; contributed c.21% to group revenue), due to a continued decline in social housing demand and reduced trade with a major customer. In H1 FY17, the group’s lfl revenue was up 2.7% while reported revenue advanced by 3.5%, underpinned by the scope impact (11 Benchmarx and 24 Toolstation branches opened during the period). Despite the stable gross margin (due to improved pricing activity to recover input cost inflation), the H1 FY17 adjusted operating profit slumped by 2.1% to £190m (in line with our estimate), impacted by a challenging P&H business (profitability down c.32%) and investment in store refitting and IT capability. The management outlined the next leg of the transformation plan for the ailing P&H division (further details in the analysis section). It also declared an interim dividend of 15.5p per share (+1.6% yoy) and maintained the FY17 guidance – effective tax rate: 20%, capex: £170-190m, property profits: c.£20m, finance charge: comparable to FY16. The management also remains cautious on the trading performance for the remainder of the financial year, largely due to mixed macro-economic indicators.
Travis Perkins, the UKs largest building merchant, has issued interim results for the six months to Jun-17. Overall headline numbers were broadly in-line, with earnings helped higher than expected property profits. Overall delivered LFL growth of 2.7% during 2Q17, in-line with 1Q17. However, investors are likely to focus on (1) cautious tone running throughout the statement (2) weak out-look statement and (3) yet another transformation plan in plumbing. I bet the current management team wish the old guard had never bought BSS. Ahead of the analyst meeting we are maintaining our HOLD recommendation. Though we flag the risk to our recommendation and forecasts are clearly on the downside.
Travis Perkins reported its Q1 FY17 trading update slightly ahead of our estimates. Lfl revenue increased by 2.7% (vs Q4 FY16: +2.5%, Q3 FY16: +2.0%; AV estimate: +1.6%), on the back of strong pricing activity at the group level and a solid performance in the Contracts business (+12.1% vs Q4 FY16: +9.2%, Q3 FY16: +5.7%; AV estimate: +3.0%; c.20% of group revenue). The segment’s growth was led by strong new build volumes and soft comparables (+2.1% in Q1 FY16). Plumbing & Heating (-1.1% vs Q4 FY16: -2.7%, Q3 FY16: -4.1%; AV estimate: -3.0%; c.22% of group revenue) and the Consumer segment (+2.9% vs AV estimate: +5.5%; -3.0% lfl impact of Easter falling in Q2 this year) also clocked satisfactory results. However, General Merchanting was down 0.3% (vs Q4 FY16: +0.3%, Q3 FY16: +0.6%; AV estimate: +1.0%; c.33% of group revenue), largely due to subdued demand and tough comparables (+4.7% in Q1 FY16). The reported revenue was up 4.9% (vs FY16: +4.6%; AV estimate: +2.9%), on the back of a +0.6% scope effect and +1.6% calendar day impact. Management remains watchful about the UK RMI market and expects to meet the FY17 guidance (capex of £170-190m, interest charge of c.£28m and 20% effective tax rate).
Travis Perkins reported FY16 results slightly ahead of our estimates. The lfl revenue increased by 2.7% (vs FY15: +3.8%; our estimate: +2.5%), largely driven by the strong performance in the Consumer (FY16: +6.4%, FY15: +5.3%, our estimate: +6.5%; led by Wickes and Toolstation) and Contracts divisions (FY16: +5.0%, FY15: +8.5%; our estimate: +3.5%; led by market share gains in the heavy civils and drainage market). The organic revenue growth in the General Merchanting division came in at +1.7% (vs FY15: +3.8%; our estimate: +2.0%), but the Plumbing & Heating division continued in the red (FY16: -1.6%, FY15: -1.4%; our estimate: -1.5%), on the back of subdued demand from the social housing replacement market and intensifying competition from online/fixed price merchants. The reported revenue was up 4.6% (vs FY15: +6.5%; our estimate: +4.8%), largely due to a +1.6% scope impact (net 25 branches opened during the year). The adjusted operating profit came in at £392m (vs our estimate: £384m), however, an impairment charge of £235m reduced the net profit to just £14m. A final dividend of 29.75p per share was proposed, taking the full year amount to 45p (+2.3% yoy). However, the company remains cautious about the UK outlook (anticipating higher cost price inflation, subdued consumer discretionary spending and lower secondary housing transactions). For FY17, management expects capex of £170-190m, an interest charge of c.£28m and a 20% effective tax rate.
We believe equity investors are taking an unnecessarily cautious stance on the construction sector. Forward looking indicators (e.g. consumer confidence, construction PMIs and housing starts) point to a stable market and recent sales LFL are particularly encouraging (e.g. Marshalls). Near term margins may suffer temporary distortions as inflationary pressures build. However, history has shown that modest input cost inflation is actually a positive for earnings growth in the sector. Therefore, as we move into 2018, margin trends are likely to surprise on the upside.
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Travis Perkins reported Q3 FY16 trading update below our estimates. Lfl revenue came in at 2% (vs our estimate: +3.4%; Q2: +2.3%, Q1: +4.2%), largely due to the softer market conditions in the General Merchanting business (+0.6% vs our estimate: +3.5%; Q2: +1.1%, Q1: +4.7%). The ongoing slump in the Plumbing & Heating business (-4.1% vs our estimate: +1.0%; Q2: -1.4%, Q1: +2.2%) further dragged down the top-line. However, the Contracts business sustained the strong organic growth momentum (+5.7% vs our estimate: +3.0%; Q2: 3.1%, Q1: 2.1%; c.20% of group revenue), whereas, the continuing investment in enhancing the range and store refitting (12 Wickes stores refitted in Q3; bringing the total to 50) propelled the consumer business to 6.3% lfl growth (vs our estimate: +6.5%; Q2: 6.4%, Q1: +7.3%; c.23% of group revenue). Total reported revenue increased by 3.4% (vs H1 16: 5.8%; our estimate: +4.9%), largely due to a +1.4% scope impact (net 23 branches opened during the quarter). Management guided FY16 adjusted EBITA to come in at slightly below current market consensus of c.£415m (our estimate: c.£407m). Additionally, 10 distribution centres and over 30 branches (including 15 Travis Perkins and 13 Plumbing & Heating branches) will be closed in the wake of uncertain consumer demand (post Brexit) and to enhance the supply-chain efficiency further. The company has also initiated a thorough review of the ailing Plumbing & Heating business and will discuss the results of this in mid-2017.
This time last year the building merchant sector delivered a number of profit warnings, with September-October sales disappointing. Unfortunately history appears to be repeating itself and Travis has warned that “Adjusted EBITA [will be] slightly below current market consensus of around £415m”. Given the uncertainty caused by the referendum we are not surprised (see our Brexit note of 22 July), when we moved our earnings estimates to below consensus.
Travis Perkins (TP) reported H1 FY16 results below our estimates. The lfl underperformance (+3.1% vs our estimate of +4.6%; Q2: +2.3%, Q1: +4.2%) was largely due to weak consumer demand in the wake of the Brexit referendum (deferment of projects by some large-scale contractors) and strong comparables (Q2 FY15: +6.3%). General Merchanting clocked an lfl growth of +2.9% (Q2: +1.1%, Q1: +4.7%; c.33% of total sales) due to lacklustre demand for heavy-side products during May and June. Plumbing & Heating was up 0.4% (Q2: -1.4%, Q1: +2.2%; c.23% of total sales), facing continuing pricing pressure in the end markets (particularly contract installers) and deflation in some of the product categories (mainly copper, steel and plastic tubing). However, the Contracts segment continued positive growth momentum of +2.7% (Q2: +3.1%, Q1: +2.1%; c.20% of total sales) on the back of business wins. Also, the growth in the Consumers segment came in at +6.5% (Q2: +6.4%, Q1: +7.3%; c.23% of total sales), propelled by a solid performance from refitted Wickes stores (currently 32 new-format stores out of 236 shops). The total reported revenue met our expectation at 5.8% growth, benefiting from the scope effect (+1.9%; net 14 new branches opened) and an additional trading day (+0.8%). The EBITA margin (excluding property profits) declined by 10bp yoy to 6.1% (60bp below our estimate). The operating leverage achieved in General Merchanting division was offset by pricing pressure in the Plumbing & Heating segment and the expansion of low-margin CCF branches. During H1, the company incurred capex of £120m (planned £200m in FY16) and declared an interim DPS of 15.25p (+3.4% yoy). Furthermore, management guided for a better Q3 (largely on the back of weak comparables), but remains apprehensive about short-term growth in the end markets due to expected sluggishness in the RMI, new construction and infrastructure spending amidst the Brexit uncertainties.
Interim results from Travis Perkins are slightly below our expectations at the earnings level (e.g. adjusted operating profit £194m 1H16 +4.9% vs PG estimate of £197m). FY16 guidance has been reduced to reflect uncertain (post Brexit) trading environment.
Travis has a preeminent position in many segments of the UK merchanting market. It has a strong brand and a well-executed operational strategy. This is reflected in consistent EBIT margins (6.6%-7.7% FY09-FY15) and healthy RoIC (average 11.7% FY09-FY15). However, the collapse in sentiment will undoubtedly impact on trading, it is just a matter of “by how much?” and “for how long?”
We have now entered the third and decisive stage of the UK’s EU referendum campaign. The launch of campaigning on 15 April saw the beginning of stage one as momentum was captured by the Remain campaign. A series of economic analyses identified the referendum as a risk event damaging to household finances and proved key to a rebound in Sterling. This momentum was recast as the UK entered stage two during a 24-hour period on 26 May. The net migration numbers for 2015 (333,000) were released and the government ceased to be supported by the Civil Service as a result of purdah. This momentum then sat with Leave until 16 June when a combination of the murder of the Labour MP Jo Cox and the third and final phase of campaigning got underway, which is set to benefit the status quo and the better organised and funded campaign – in this case Remain.
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Travis Perkins released its trading update for Q1 16, slightly below our estimates and ahead of market consensus. The lfl revenue was up 4.2% (vs Q4: +1.4%, Q3: +2.6%, H1 15: +5.7%) on the back on better RMI activity; new space addition further propelled total revenue growth to +5% (+6.2% on a comparable days basis) vs our estimate of 6.9%. - General Merchanting: Lfl revenue was up 4.7% on the back of growth in the Benchmarx business, heavyside categories and timber (further supported by investment in new range centres). - Contracts: Lfl growth moderated to +2.1% due to strong comparators in Q1 15 (+15.1%; although a better performance qoq, Q4 15: -1.9%). The conversion of 13 Keyline branches to the Travis Perkins brand in January eroded segment revenue by 2.2%. - Consumer: The positive momentum in Wickes and market share gains (Toolstation and Tile Giant) pushed up lfl revenue by 7.3% (vs Q4: +6.1%, Q3: +2.3%, H1: +6.5%). - Plumbing & Heating: Q1 marked the inflection point for the Plumbing & Heating division following the completion of the store conversion process (PTS to City Plumbing). The lfl revenue recovered by +2.2% (vs Q4: -1.9%, Q3: +1.7% and H1: -2.9%) on account of good growth in the City Plumbing business (CPS), while sales at Plumbing Trade Supplies (PTS) remained flat. Travis opened five new Benchmarx showrooms and nine Toolstation stores during the quarter. Management reiterated guidance of 10% EBITA growth for the year.
Travis Perkins (TP) released FY15 results slightly lower than our expectations, with revenue up 3.8% on a lfl basis and 6.5% on a reported basis (vs our estimate of +7.2%) to £5,942m and adjusted EBITA of £412.6m (7.6% growth yoy vs 8% guidance). The lfl growth rate moderated to 1.4% in Q4 after 2.6% in Q3 and 5.7% clocked in H1 due to the weakness in the RMI market in the second half. However, the market has seen an uptick in demand during January and February, which management sees as sustainable and instrumental for the 2-3% growth in 2016 (see later for our view on this). In the General Merchanting business (+1% lfl in Q4 vs +1.7% in Q3 and +6.7% in H1), a strong growth in heavy-side products in H1 was partially offset in H2. Similarly, the Contracts division witnessed a slowdown in lfl growth of 1.5% (vs +5.5% in Q3 and +13.9% in H1); the good performance of Keyline and CCF businesses was offset by sluggishness in the BSS business (competitive pricing and commodity price deflation). Conversely, the Consumer division (the best performing segment) reported +6.1% lfl growth in Q4 (vs +2.3% in Q3 and +6.5% in H1), predominantly driven by strong kitchen and bathroom sales at Wickes and continued lfl growth and network expansion in Toolstation. The segment outperformed peers Kingfisher (B&Q: +4.4% lfl, Screwfix: +15.1% lfl in the quarter ended January) and Homebase (+3.3% in the quarter ended February) during the quarter. Also, the adjusted operating margin improved by 80bp yoy on the back of improved customer propositions in Wickes and Toolstation. The Plumbing & Heating (P&H) business continued to suffer from competitive pricing in the industrial plumbing market and accelerated restructuring (branch re-segmentation). The lfl revenue declined by 1.9% in Q4 (vs +1.7% in Q3 and -2.9% in H1). An impairment charge of £140.6m (PTS (£109.9m) and F&P (£30.7m) in the P&H business dented the net profit, which fell by c.35% to £167.7m during the year. Adjusted net profit for the year picked up by 10.8%, while the full-year dividend was increased by 15.8% yoy to 44p per share. For 2016, management expects to better the market growth of 2-3% by 1% and, coupled with 2% growth from new space, aims for headline revenue growth of 5-6%. Medium-term EBITA growth guidance was reiterated at 10%.
Travis Perkins (Hold) has issued a set of in-line FY15 results. Q4 like for likes highlighting slowdown in the UK construction market, though it must be stressed that most of the market remains in expansion mode. The one bleak spot was Plumbing & Heating which fell back into delivering negative like for likes, even despite easy comps. Investors will also be disappointed to see £141m impairment of PTS and F&P assets, due to challenging market conditions. Sales guidance for FY16 +5% to +6%, compares with +6% to +7% guidance given for FY15. Shares have found some support in recent weeks and we maintain our Hold recommendation.
Since we moved from Buyers to Sellers last summer the Travis share price has fallen by a fifth. The original bear recommendation was based on valuation concerns. Then the UK construction market wobbled and most in the sector warned, thereby providing a second leg down. The 12 month forward P/E has now contracted by 23% to 12.7x and is broadly in-line with previous support levels. Therefore, with no material negative catalysts on the horizon we are moving our recommendation from a Sell to a Hold.
With the blip seen in July and August across UK housing data, Travis Perkins Q3 15 trading update was no exception. Lfl sales growth moderated to 2.6% vs. 5.7% seen in H1 as demand slowed across all businesses in July and August. Nonetheless, management confirmed that it saw recovery in volumes in September and October, and expects demand to be sustained. - Sales growth in General merchanting abated to 1.7% during the quarter vs. 6.7% in H1 on the back of weaker volumes and less favourable pricing. - Consumer business grew 2.3% on a lfl basis vs. the strong growth of 6.5% witnessed in H1 as the DIY market remained challenging in July and August (reiterated as much in the Home Retail results as well). - Plumbing and heating returned to growth (+1.7%) vs. the 2.9% decline in H1 as the segment benefited from a weak comparative; however, market conditions remain tough and sales disruption is expected to continue until the end of the conversion programme (with 107 conversions done in 9M to take the total to 153 conversions of the 180 planned for FY15). - Contracts’ sales growth came in at 5.5% in Q3 as opposed to 13.9% growth in H1, with some pricing pressure In terms of outlook, due to the market weakness in the quarter, management now expects FY15 EBITA growth to be at the lower end of market expectations, i.e. close to £415m (+8% EBITA growth, from 10% guided earlier).
As with others in the sector, Travis Perkins is finding the trading environment in the UK tough. It has warned that it experienced weaker summer demand. However, it is putting a brave face on things and claiming that lead indicators point to a recovery during the fourth quarter. Santa may bring an early Christmas present, but we are not holding our breath. We are provisionally cutting FY15 PBT forecast from £395m to £375m. Given the deterioration in trading we are maintaining our Sell recommendation and reducing our target price from 1950p to 1650p.
As with others in the sector, Travis Perkins is finding the trading environment in the UK tough. It has warned that it experienced weaker summer demand. However, it is putting a brave face on things and claiming that lead indicators point to a recovery during the fourth quarter. Santa may bring an early Christmas present, but we are not holding our breath. We will be reviewing our (previously broadly consensus) forecasts following the conference call. But for now they are clearly under review. However, given the deterioration in trading we are maintaining our SELL recommendation and reducing our target price from 1950p to 1650p.
Interim results were greeted with mixed emotion. The shape of the growth was in-line with previous updates; full year's earnings guidance remained unchanged. The multi-brand strategy is clearly working, with most parts of the business winning market share. Investors have re-rated the shares (12 month forward PER increasing from 13x to >16x YTD). This puts the valuation broadly on par with Grafton and Wolseley. In the absence of any upgrades we think the PER could well contract in the short term. As a consequence, we are reducing our target price to 1950p (previously 2300p) and moving from Buy to Sell.
Travis Perkins is benefiting from the continued upswing in construction activity, with total sales growth of 7.8% (60 basis improvement vs 1Q and outperforming the overall market, which is growing 5%-6%). Excluding property profits EBIT is +9.0%. The broad portfolio of distribution brands is clearly performing well and given the near term macro environment we expect positive trends are maintained. Moreover, the on-going re-positioning of the network should provide further scope for operational outperformance.
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