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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October 11, 2023

FORT, WJG, WINK, MTO, VP., TPK, BRCK, SFE, BYG | Economy – Mortgage rates continue steady decline but longer-term loans increase

Company research

Forterra (FORT, 144p, £306m mkt cap) – FORT is a client of PERL

UK’s second largest brick producer and leading building materials producer. Autumn trading update. Link to Progressive Equity Research note, Housebuilding slowdown dampens demand:

“Forterra has indicated that recent industry-wide data showing declines in brick deliveries as a result of lower housebuilding volumes is likely to impact its expected FY [Dec] 23 volumes, leading the group to moderate current year guidance for revenue and PBT. Forterra has responded by outlining further steps to align production with demand, but notes that heightened political focus on increasing housing supply reinforces its long-term confidence.”

Watkin Jones (WJG, 35p, £89m) – WJG is a client of PERL

Residential for rent developer and manager in the build-to-rent (BTR) and student accommodation sectors. YE (Sep) trading update. Link to Progressive Equity Research note, FY23E outlook dips slightly; FY24E unchanged:

“Watkin Jones’s FY23E year-end trading update is broadly in line with our expectations, albeit with slightly higher costs than previously signalled but significantly better net cash and no change to the remedial works provision. Encouragingly, guidance for FY24E is unchanged, with progress in forward sales of student and private assets to institutional investors. Data from both student and private rental markets continues to show huge under-supply.”

Company news

M Winkworth (WINK, 143p, £18m) – PERL provides research services to Shore Capital on this stock

Franchised estate and lettings agency, focused on London and SE. Dividend declaration. The company will pay a dividend of 2.9p per ordinary share for the third quarter of 2023, equal to the Q1 and Q2 dividends.

Mitie Group (MTO, 99p, £1,326m)

UK facilities management group. HY (Sep) trading update.

Guidance: “FY24 expectation for operating profit before other items raised to at least £190m underpinned by good ongoing trading and delivery of margin enhancement initiatives”.

Trading: H1 rev +11%, c. £2.1bn; five “higher growth, higher margin strategic bolt-ons” acquired for £46m; ave daily net debt, c. £160m (HY 23, £62m), closing net debt to c. £115m (£64m), “reflecting higher M&A spend and ongoing shareholder returns ongoing trading and delivery of margin enhancement initiatives”. Second £25m share buyback of £50m programme launched today.

Outlook: “From H2 FY24, it is expected that the Landmarc military training estate joint venture will be consolidated as a subsidiary of Mitie. This will enable Landmarc to benefit from the wider capabilities of Mitie, adding an incremental c. £40m of revenue and c. £5m of operating profit in H2 FY24 [included within new guidance]. EPS is not impacted”. Capital Markets event, tomorrow. HY results, 23 November.

Vp (VP., 490p, £197m)

Construction equipment rental group. HY (Sep) trading update.

Guidance: “The group as a whole continued to trade resiliently in the period against a backdrop of challenging macro-economic conditions impacting certain end markets. Within the UK businesses, infrastructure, including water, transmission and rail, continues to perform well, with longer-term regulatory programmes proving supportive. Housebuilding demand remains subdued but stable. General construction remains challenging. The overseas businesses continue to trade well at levels ahead of H1 2023 and the Board expects end markets to positively impact the current financial year.

Outlook: “We have delivered a solid performance in the period and are confident that we will continue to achieve our objective of driving demand for our products and services. With our strong financial position, we have an excellent track record of successfully navigating volatility in our core markets. We continue to closely monitor the impact of weaker markets in housebuilding and general construction; however, we remain confident that the group will continue to provide shareholders with an attractive level of returns”. HY results, 28 November.

Travis Perkins (TPK, 806p, £1,702m)

Leading UK builders’ merchant and owner of Toolstation. Q3 (Sep) trading update.

Guidance: “With commodity deflation expected to continue and the exit rate from the third quarter indicating further challenging conditions for the balance of the year, the group now expects to deliver an adjusted operating profit in the range of £175 – 195m for the full year [previously “around £240m”].

Trading: Q3 LFL Y/Y rev growth -1.8% (-2.9% Merchanting; +4.4% Toolstation); YTD Y/Y, -2.7% (-4.1%. Merchanting; +5.0% Toolstation). Within Merchanting, volume change improved to -0.3% in Q3, from -6.4% YTD. “Whilst third quarter trading started as expected in Merchanting, September saw a notable deterioration in market activity and sentiment. Q3 revenue was a modest improvement on the first half, however the drivers of revenue have shifted markedly. Pricing declined by 3.1%, resulting primarily from strong deflationary pressures on commodity products which have significantly impacted on gross profit and margins, including the impact of selling through existing stocks at lower market prices. All merchant businesses have been focused on driving volume by delivering great service and competitive prices for customers. This has resulted in a positive response from customers and, as a consequence, volume performance improved to flat year-on-year in the quarter”. Toolstation UK revs +7% in Q3; Toolstation Europe +9%.

Brickability Group (BRCK, 47p, £140m)

Construction materials distributor. HY (Sep) trading update, acquisition.

Guidance: “The performance for the first six months of the year was in line with Board expectations in the face of a challenging UK housebuilding market, with revenue for H1 FY24 expected to be approximately £324m (HY 23, £353m). Adjusting for the impact of acquisitions, H1 FY24 Group revenue on a like-for-like basis represents a decrease of c.14% compared to the same period in the prior year. As a result, the Board currently anticipates reporting adjusted EBITDA for the six months to 30 September 2023 of at least £24.0m, in line with Board expectations. Whilst the group has traded in line with Board expectations through H1, and the acquisition [below] will be immediately earnings accretive in the current year, forecast reductions in newbuild volumes are expected to have a corresponding impact upon the performance of the existing businesses throughout the second half”.

Acquisition: Scotland-based Topek acquired for a consideration of up to £45m. It offers a range of services which will complement the group’s existing cladding portfolio, including Taylor Maxwell Cladding, SBS Cladding, and Architectural Facades, meaning that the Group now has a full range of cladding capabilities including design, fabrication, supply, and installation. The acquisition, Brickability’s second largest to date, will also significantly increase the group’s presence in the cladding remediation market. Since 2017, the requirement for cladding remediation in the UK has been of huge importance. In the 12 months to 31 August 2023, Topek generated unaudited revenue of £21.2m and adjusted EBITDA of c.£8.0m. The consideration comprises an initial cash consideration of £27.3m on completion, subject to final working capital adjustments to acquire the business on a cash-free, debt-free basis, and deferred contingent consideration of up to £17.7m.

Outlook: “Whilst the second half of the year is anticipated to see industry wide volume reductions, from which the group is not immune, the Board believes that Brickability’s diversified, multi-business, approach enables the Group to continue to perform well in the current market backdrop and that this strategy best positions the Group for the future”.

Safestyle UK (SFE, 2p, £3m)

UK manufacturer, recycler and distributor of window, door and roofline PVC products. Response to media speculation. The group “notes latest press coverage and provides an update on the status of the ongoing work outlined following its previous update on 3 October. The Board confirms that it has engaged Interpath Advisory to assist with the process that the Group is continuing to explore, which may include a capital injection or new financing, a potential sale of the shares in the subsidiaries and/or a sale of the business and assets of the subsidiaries. The Board can also update the market that the process underway has resulted in a number of different parties declaring their interest at this time and the Board and its advisors will continue to engage with these parties in the coming days. As also outlined in the most recent update on 3 October, the Board continues to engage with the group’s bank, which remains supportive whilst re-iterating that maintaining its ongoing support is still expected to be inter-conditional on achieving a positive outcome from this process”.

Big Yellow Group (BYG, 973p, £1,796m)

Self-storage REIT. Results of capital raise. A total of 11.5 million new shares have been placed at a price of 945p with existing and new institutional investors, raising gross proceeds of c. £108m. A separate retail offer made via the PrimaryBid platform for a total of 170,000 new shares at the Placing Price raised gross proceeds of c. £1.6m. The placing price represents a discount of 2.9% to the closing share price of 973p on 10 October 2023. The placing shares and retail offer represent approximately 6.3% of the existing issued ordinary share capital of the Company prior to the Capital Raise.

Economic data

Mortgage lending. The latest weekly mortgage rates tracker from Rightmove (site to be updated for latest week) shows continuing steady fall for move two-year and five-year fixed rates across a range of LTVs, especially at lower multiples. Rightmove’s analysis is: “The market remains stable, though eyes may soon start to turn towards the next sets of economic data, alongside the Autumn statement next month, and how swap rates respond to any news. Nevertheless, we expect the trend of steady rate drops to continue for now and the next key highlight to look out for will hopefully be a sub-5% rate on offer in the important mass-market 85% LTV bracket”.

2023-10-11 Average Mortgage rates, 5-year and 2-year fixed (%)

Separately, the Bank of England reports that the share of new mortgage lending on terms of at least 35 years has increased from 4% in Q1 2021 to 12% in Q2 2023.

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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Opinions contained in this communication represent those of PERL and/or our affiliates at the time of publication and PERL does not undertake to provide updates to any opinions or views expressed. PERL does not hold any positions in the securities mentioned in this communication, however, PERL’s directors, officers, employees, contractors and affiliates may hold a position,  and/or may perform services or solicit business from, any of the companies or related securities mentioned.

Any prices quoted in our research are as at the previous day’s close.