Property & Construction Daily

The Property & Construction Daily provides a sector-specific comment from leading analyst Alastair Stewart. His daily perspective provides a round-up of market statements, news, economics and views from the property and construction sectors.

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August 23, 2023

COST, HOME, MER | Economy – mortgage rates fall for fourth week

Company news

Costain Group (COST, 48p, £133m)

UK construction and infrastructure services group. HY (Jun) results. Rev -0.1%, £664m; adj op margin, 2.3% (HY 22, 2.1%; stat op margin, 1.1% (1.8%); adj PBT +20%, £15.9m; stat PBT -24%, £8.5m; adj EPS +13%, 4.4p; “interim dividend payment under consideration by Board with announcement expected to be made shortly” (FY 22, 0p); net cash, £132m (HY 22, £96m). Adjusting items, £7.4m (£2.6m), comprising £2.1m on restructuring costs and £5.3m impairment following repositioning of digital services. Pension scheme review and refinancing of bank and surety facilities concluded in period and July 2023 respectively. Orders, £4.0m (££4.3m), “reflecting market cycles, continued disciplined approach to contract bidding and the rephased
timing of major contract bids”.

Trading: Transportation division – rev -1.5%, £487m (Road, -16%; Rail, +18%), reflecting HS2 in Rail and “rephasing and rescoping” in Road. Adj margin, 2.5% (3.2%), reflecting inflation and costs in Road. Natural Resources (Water, Energy and Defence & Nuclear) – rev +3.9%, driven by strong Defence work. Adj margin, 4.2% (1.4%) “due to an improved operational performance as well as revenue growth”.

Outlook: “We continue to trade in line with Board expectations for FY 23. Our pipeline of future opportunities remains strong across our markets. We remain track to deliver an adjusted operating margin run-rate of 3.5% during the course of FY 24 and 4.5% during the course of FY 25; in line with our ambition to deliver margins in excess of 5%”. Strong cash collections in H1 likely to unwind in H2, with likely YE 23 net cash similar to HY, at c. £130m.

Home REIT (HOME, shares suspended)

Real estate investment trust funding the acquisition and creation of properties providing accommodation to the homeless. Transfer of sub-leases. One (Housing & Support) CIC has agreed to surrender its leases on 100 properties comprising a total of 418 beds. Mears Limited, guaranteed by Mears Group (MER.L), the housing and social care provider, has been occupying the properties on a sub-lease from One CIC. These sub-leases will now transfer to Home REIT, with Mears Limited becoming a direct tenant for the remaining lease term of c.6.6 years with an initial contracted rental income of £891k pa. The surrender agreement allows Home REIT to receive a sustainable income stream and is expected to generate significantly higher rent collection than has previously been received from One CIC in relation to the properties, despite a lower headline rent (previously £1.3m pa). Home “continues to work constructively with One CIC to find sustainable solutions for the other 234 properties it currently rents from Home REIT. This transaction reduces the Company’s exposure to One CIC from 13.5% to 9.5% by number of properties and 14.2% to 11.9% by contracted rent roll (as at 31 July). “The transaction is in line with AEW’s strategy as Investment Manager to stabilise the company’s portfolio. The current occupiers will not be impacted as a result of this transaction”.

Economic data

Mortgage rates. Fixed rate mortgage rates fell for the fourth consecutive week, according to the latest weekly data from Rightmove. Reductions were tracked across 95%, 90% and 85% fixed rate five-year products, with the biggest reductions have been in lower LTVs (see below), indicating improving confidence and continuing competitiveness among lenders. Two-year rates also fell, but remain above five-year offers, reflecting the
higher short-term Base Rate expectations.

Average mortgage rates 5-year fixed (%)


Prices are as at the previous day’s close. Where quoted, net debt is pre-IFRS16 (excluding leases) unless otherwise stated.

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