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.

January 17, 2024

GFRD, IBST, KLR, PRSR, SHED, SAFE | Economics – house prices fall as inflation ticks up, ONS

Company news

Galliford Try Holdings (GFRD, 241p, £247m)

UK construction and infrastructure services group. HY (Dec) trading update.

Guidance: “Trading is ahead of the prior year period and the Board’s expectations, which were previously increased at the time of the full year results in September. With good visibility over the second half, revenue for the full financial year is now expected to be approximately 5% ahead of current market expectations [£1,435 -1,490m], with an equivalent increase in expected profit before tax [adj PBT, £25.2 – 28.1m]. Ave month-end cash, c. £149m (FY (Jun) 23, £135m); period-end cash, £209m (HY 23, £196m), following share buybacks of up to £15m. The group continues to maintain PPP portfolio and has no debt or pension liabilities. “The strong balance sheet supports our ability to secure high quality contracts and frameworks, attract a highly skilled supply chain and continue to invest in the business.”

Trading: “The group is performing well, with strong momentum throughout the first six months of the current financial year and continues to make good progress against its Sustainable Growth Strategy. We are pleased with our recent acquisition of AVRS Systems in November and the progress of the integration of this specialist business in our growing Environment division. Together with our acquisitions of Ham Baker and MCS at the start of the last financial year, the Environment division is developing its adjacent market strategy as planned”. Orders, £3.7bn (£3.5bn), predominantly in long term frameworks. Progress in build-to-rent strategy includes £87m development in north London for Related Argent and Invesco Real Estate and £52m contract in Cardiff.

Outlook: “We continue to see a robust pipeline of opportunities, supported by our strong track record and focus on the public and regulated sectors alongside high-quality private clients. Given the excellent progress to date against the group’s Sustainable Growth Strategy, the Board expects to update its strategic targets to 2030 during the second quarter of 2024”. HY results, 6 March.

Ibstock (IBST, 143p, £562m)

UK’s largest brickmaker. FY (Dec) trading update.

Guidance: “Trading in the final quarter in line with our expectations, with market conditions remaining subdued. Full year revenues expected to have decreased by 21% to approximately £405m. Adjusted EBITDA for the full year expected to be in line with our previous expectations, despite a continuation of the weaker market conditions experienced during the third quarter, reflecting cost and capacity reduction initiatives and a resilient margin performance for the year as a whole”. YE net debt, c. £101m (FY 22, £46m), following £46m of capex in growth projects and material investment in inventories, which were rebuilt from historically low levels during 2023. “Given the challenging market backdrop, during the final quarter of the year we conducted a comprehensive operational review, with the objective of aligning our fixed cost base and capacity to near term demand expectations. The consequent restructuring plan included a number of actions to temporarily reduce capacity across the business, as well as the permanent closure of our South Holmwood brick factory in Surrey”. The annualised benefit of this restructuring plan will be £20m, with around £5m of this captured in 2023 and the balance to be achieved in 2024. The one-off cash cost, including the closure of the Ravenhead brick factory announced in August, will be around £15m.

Outlook: “Residential construction markets are expected to remain subdued in the near-term. While the pace of cost inflation has continued to moderate, it remains a feature, with some modest year-on-year inflation expected to be largely covered by pricing action. The group continues to manage all costs actively. While the pace and timing of the recovery remain uncertain, Ibstock is in robust financial health, with the balance sheet strength and financial flexibility to ensure we remain well-positioned for a return to growth over the medium term”. FY results, 6 March.

Keller Group (KLR, 830p, £604m)

World’s largest ground engineering group, with 60% exposure to North America. FY (Dec) trading update.

Guidance: “The positive trading momentum and strong operational performance seen in the first nine of months of the year continued in the fourth quarter, with a particularly strong end to the year. Accordingly, we now expect to report an underlying operating profit for the year significantly ahead of current market expectations [£150m]. The underlying operating profit margin for the year is expected to be significantly ahead of recent years”. As a result of the significant increase in profits in North America, the underlying effective tax rate in 2023 is expected to be c. 25%, versus previous guidance of c. 22%. Earnings performance and working capital management, is expected to result in cash generation for the year being “a considerable improvement on the prior year and ahead of our previous expectations”. YE net debt/EBITDA leverage to be c. 0.6x, at the lower end of target range of 0.5x – 1.5x (FY 22, 1.2x).

Trading: North America – management actions to improve performance in the foundations business in H2 “generated a material and sustainable improvement in performance, with a resultant uplift in operating margin. In addition, the division benefited from better than expected pricing resilience at Suncoast, which is now unwinding and the contribution from three large projects in the foundations business delivered materially higher than normal levels of contract profitability. These two material, non-recurring benefits are considered one-off in nature and are not expected to repeat in 2024”. Europe – “the macro-economic environment remained a challenge in the second half, with weak demand and competitive pricing impacting profitability. In addition, some challenging projects in the Nordic region created a further drag on margins in the year. As a result of these combined issues, the division will deliver a full year performance below our original expectations and we are taking corrective actions to drive an improved performance in 2024”. Asia-Pacific, Middle East and Africa (AMEA) – Keller Australia expected to report a record performance for the year, following very high levels of demand and improved operational execution. Austral returned to a sustainable profit in H2, albeit insufficient to offset the loss experienced in the first half. At NEOM, “we continue to take a measured and disciplined approach to the opportunities provided by the project. Whilst we remain in constructive discussions with the client in respect of future work on The Line, we do not have a current works order and have redeployed resources in the short term”. However, a work package worth c.US$80m was recently awarded in respect of Trojena, the winter resort development at NEOM, with work expected to be completed by the end of 2024.

Outlook: “The fundamental strengths of the business, together with the continued positive outlook and our strong order book, give us confidence in further progress in 2024”. FY results, 5 March.

The PRS REIT (PRSR, 85p, £465m)

Real estate investment trust investing in private rental sector (PRS) family homes. Q2 (Dec) trading update. Completed homes +7.1% Y/Y, 5,264; estimated rental value +19%, £60.3m. “The company’ homes delivery programme is now at a very mature stage. As at 31 December, a further 312 homes, with a combined ERV of £3.1 million, were contracted and under way, at varying stages of the construction process. Once these homes have been completed, the ERV of the portfolio is expected to increase to c.£63.4m pa (30 Sep, £60.7m). Rental demand for the company’s homes remains very high, reflected in very strong rental growth and occupancy rates [99%]. Affordability, average rent as a proportion of gross household income, continues to be well within Homes England’s upper guidance limit of 35%. Reflecting the tenant base, where average household income has increased, the company’s homes have an affordability ratio of c. 22%.

Urban Logistics REIT (SHED, 122p, £575m)

Specialist UK ‘last mile’ logistics real estate investment trust. Lettings update. “Demand for space continues to outstrip supply in the company’s specialist sub-sector of last mile, last touch delivery. The company has completed seven leases since 1 October, with a further two leases either in solicitors’ hands or under offer, with like-for-like increases in passing rent of 31% achieved on more than 400,000 sq. ft, generating an additional £0.5m in rental income. We remain confident in Urban Logistics’ unique strategy of acquiring last mile single let mid box assets with appealing opportunities to add value through active asset management, which will continue to drive the company forward in 2024 and beyond.”

Safestore Holdings (SAFE, 850p, £1,854m)

UK-focused self-storage group, with stores in Paris, Barcelona and Netherlands. FY (Oct) results. Rev +5.5%, £224m); u-lying EBITDA +5.3%, £142m; stat PBT -58%, £208m; adj EPRA EPS +0.8%, 47.9p; div +1.0%, 30.1p; EPRA TNAV +4.8%, 952p; net debt, inc leases, £810m (FY 22, £698m); gearing 29.5% (28.0%).

Trading: Max lettable space +5.1%, 8.1 million sq ft; occupancy 77.0% (82.1%); ave storage rate +3.5%, £30.26. New stores or acquisitions added c. 500,000 sq ft of new lettable space across thirteen projects (five in the UK, six in Spain and two in Netherlands); total development and extension pipeline increased to 30 projects and 1.5 million sq ft representing c. 18% of the existing portfolio, providing £25 -30m of future EBITDA at stabilisation. Entry into German market via a JV with Carlyle, which has acquired the seven-store myStorage business with 326,000 sq ft of storage.

Outlook: “As disclosed in our 2023 half year results, we expect the development pipeline and associated financing to be dilutive to earnings in 2024 before becoming highly accretive in future years as the stores stabilise. For the first two months of 2024 total group revenue is broadly flat with like-for-like revenue down 0.6% on the prior year.  Regionally, we have seen strong like-for-like growth in the Netherlands and Belgium, solid improvements in Paris and Spain and a modest decline in the UK. Further, in the first two months of the 2024 financial year, the Group took limited promotional actions that resulted in year-on-year UK like-for-like occupancy improving from -3.8ppts as at 31 October to -1.4ppts at 31 December, and similarly from -0.4ppts to +0.3ppts in Paris. The immediate impact on rates is expected to gradually reduce over the next few months, particularly as the group will annualise the discounting activity that took place later last year in spring. Whilst we are fully aware of the current macro-economic environment, our business model has proven to be highly resilient with multiple drivers of demand. We believe the group is strongly positioned to withstand pressures from challenging market conditions”.

Economic data

House prices, inflation. Average UK house prices fell by 2.1% Y/Y to £285k in Nov, from -1.3% in October, latest data from the ONS shows. The non-seasonally adjusted M/M figure was -0.8%, the third consecutive decline, following -0.4% and -0.6% in Sep and Nov respectively. Prices increased Y/Y in Scotland (+2.2%) and Northern Ireland (+2.1%), but fell in Wales (-2.4%) and all English regions. Of the latter, smallest decline was in the North East (-0.4%) and largest, London (-6.0%). The ONS price data is the most comprehensive series, since it takes in cash as well as mortgaged transactions, and is measured when sales complete. More up to date indicators from lenders Halifax and Nationwide, measured at mortgage approval, have been showing M/M increases in the past two to three months. The ONS price data was released alongside inflation statistics, which today showed the first increase in CPI since Feb, with the rate for Dec ticking up to 4.0% from 3.9% in November (blamed on price hikes on cigarettes and booze – I’ll have to temper my intake of the latter); economists were expecting the rate to nudge down to 3.8%, prompting falls in housebuilders’ share prices so far this morning.

Annual House Price Rates of Change
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