New work dampens construction output | Fortnight ahead | FORT, BKG, SRC

Company research

Forterra (FORT, 212p, £451m mkt cap) – FORT is a client of PERL

UK’s second largest brick producer and leading building materials producer. Link to this morning’s PERL note, Robust performance amid FY22 challenges, following yesterday’s FY results:

“Brick and concrete products group Forterra narrowly beat our estimates in yesterday’s FY22 results, which showed resilient trading despite the chaos following September’s ‘mini-budget’. We have introduced initial estimates for FY23E that assume lower volumes and profits. Our market view, however, suggests that our assumptions on demand may prove conservative, while we believe that the group will benefit from recent investments as the industry recovers from multi-decade lows in inventories.”

Company news

The Berkeley Group Holdings (BKG, 4,036p, £4,367m)

London-focused residential developer and urban regeneration group. Trading update, Nov – Feb.

Guidance: “Berkeley reaffirms it is on target to deliver pre-tax earnings of approximately £600m the year ending 30 April, with at least £1.05bn to be delivered for the following two years.  These earnings are underpinned by the group’s cash due on exchanged forward sales which are anticipated to be above £2.0bn at 30 April (FY 22, £2.2bn).  Net cash at year-end is currently expected to be around £375m (£269m), subject to any further share buy-backs in the intervening period”. As announced on 23 February, a dividend of £75.2m, or 69.4p per share, will be paid on 24 March with the remainder of the £141m return for the six months ending 31 March having already been satisfied through share buy-backs. Trading: “Current trading is in line with the levels identified in the December interim results, in which sales since the end of September were around 25% lower than the strong first five months of the financial year.  This is a resilient performance in the context of the market volatility since the end of September and reflects the underlying demand for quality homes in London and the South East. Pricing throughout this period has remained firm and above business plan levels.  Berkeley remains focused on cost control and maintaining operating margins, with build cost inflation showing early signs of moderating.  Whilst the prevailing volatility in the market persists, Berkeley will continue to match supply to demand, adopting a cautious approach to releasing new phases to the market as we focus on the quality of our forward sales. The current transaction levels and firm pricing support the three-year earnings guidance provided in December”.

SigmaRoc (SRC, 56p, £389m)

Heavy construction materials group active in the UK, Channel Islands and Benelux. Investment pipeline update and trading update.

Guidance: “Good initial progress has been made in executing identified transactions, with the completion of two acquisitions, for an aggregate consideration of £12m. In addition, the Group continues to trade in line with expectations, benefitting from its broad European and end market spread, and continued gains from productivity improvements across the regional platforms. Initial investment has also been made in identified organic development projects”. The group has completed the acquisition of Goijens, a supplier of ready-mixed concrete and pumping solutions, located in the north east of Belgium. The acquisition was closed at an effective multiple of 5x recurring average EBITDA for the years 2020 to 2022, before expected synergies and operational improvements. Goijens, which generated £16m revenue in 2021, operates two concrete plants and concrete recycling facilities, as well as pumping and other services. Its footprint, which is located in the north east of Belgium on c.10 acres of freehold land, “is highly complementary to SigmaRoc’s Benelux platform”. The group has also completed the acquisition of Juuan Dolomiittikalkki in Finland for an effective multiple of 6 times recurring average EBITDA for the years 2020 to 2022, pre-synergies and operational improvements. JD is a specialist supplier of dolomitic limestone, used in the agricultural and environmental sectors to improve regulation of soil pH and water retention. JD adds approximately 1.5m tonnes of reserves, equating to roughly 30 years of operating life and €1.5m of revenues.

Economic data

Construction activity. Construction volumes decreased by 1.7% M/M in January, seasonally-adjusted, following no change in December, according to Construction Output data from ONS. This is the weakest monthly growth since June 2022 (-2.0%). The decrease in monthly construction output came from a decrease in new work, -4.0%, partially offset by an increase in repair and maintenance, +2.0% (which has been generally depressed for some time). At the sector level, five out of nine saw a fall in January 2023, with the main contributors to the monthly decrease seen in infrastructure new work and private new housing, -6.5% and -3.0%, respectively (see below). According to the release, anecdotal evidence continued the narrative around economic uncertainty leading to delays, cancellations, and less work being requested by customers; this has particularly contributed to an ongoing slowdown of work in the housing sector. This was also attributed to the mixed impact of heavy rainfall in the first two weeks of January, with outdoor work being affected negatively, but repair and maintenance work seeing an increase because of the weather. Construction output saw a decrease of 0.7% in the three months to January 2023; this follows four periods of consecutive growth in the three-month-on-three-month series; the decrease came solely from a fall in new work, -1.2%, with repair and maintenance seeing an increase, 0.3%. The Construction Output data slightly depressed today’s overall GDP figures which, nevertheless, grew by 0.3%, beating economists’ consensus of +0.1%.

Viewpoint: This may well be a short-term ‘blip’: housebuilders have been referring to a steady pick up in demand; in non-residential the recent purchasing managers’ index beat expectations, with Commercial leading the rise, presumably as settled financial markets gave investors a clearer picture of project ‘viability’.

(PS, I’m not so sure about the rainfall excuse, I can’t remember much of it in January – unlike during the past week … )