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 18, 2024

KIE, BOOT, MSLH, TPK, SMS | Economics – Fall in home buyers bottoms out, RICS

Company news

Kier Group (KIE, 112p, £501m mkt cap)

Hybrid construction, infrastructure and property group. HY (Dec) trading update.

Guidance: “Consistent with the update in November, the first half of the current financial year continued to trade above the prior period and was in line with the Board’s expectations. This was driven by strong volume growth, particularly in Construction. Similar to last year, performance is expected to be second-half weighted”. Ave month-end net debt, c. £140m (HY 23, -£243m). “Modest net cash position” at HY end (HY 23, -£131m). “The continued resilience in trading, order book security and ongoing strengthening of the balance sheet provides the Board with confidence to resume dividend payments in the current financial year, commencing with an interim dividend to be announced alongside the half year results”.

Trading: Orders +6% vs FY 23 YE, £10.7bn. 92% of revenue secured for FY 24, “providing a high degree of visibility. Bidding discipline and risk management embedded across the business continue to drive the high quality and profitable order book”.

Outlook: “Kier remains well positioned to continue benefiting from UK government infrastructure spending commitments and this gives the Board every confidence in delivering our medium-term value creation plan”. HY results, 7 March.

Henry Boot (BOOT, 197p, £264m)

Land Promotion, property investment & development and construction group.

Land sale, notice of trading update. Land promotion and planning business, Hallam Land Management has unconditionally exchanged contracts for the sale of 759 residential plots in Swindon to Vistry Group (VTY). Located in South Marston, Swindon, HLM secured an option to purchase the site over 20 years ago, and since then it has been promoting the land through the planning process, as part of a wider strategic land parcel working alongside Taylor Wimpey and Hannick Homes. In August 2021 outline planning consent was secured for a total of 2,380 residential plots across a 400-acre site, of which 1,063 relate to HLM’s site. In addition to enabling the delivery of new homes including over 500 affordable homes, the wider site will bring a number of additional community benefits including up to 26,900 sq ft of retail, food, service and business space, a new primary school and an extension to an existing school, as well as community and sport buildings, significant woodland planting, green infrastructure and children’s play spaces. The transaction is expected to result in an ungeared internal rate of return for Henry Boot of 10% pa. HLM will retain 304 plots for future sale. FY (Dec) trading update, 23 January.

Marshalls (MSLH, 250p, £633m)

Leading manufacturer and supplier of paving and hard landscaping products. FY (Dec) trading update.

Guidance: “The group’s performance in the period since the trading update on 18 October has been as anticipated and the Board expects adjusted profit before tax for the full year to be in-line with its expectations”. Net debt, £173m (FY 22, £191m).

Trading: Rev -7%, £671m, including four months of trading from Marley; LFL -13%, “reflecting lower demand from housebuilders and continued subdued activity in private housing RMI”. Marshalls Landscape Products rev -18%, £321m (LFL -16%). Marshalls Roofing Products, £180m (-9% LFL). “The closure or mothballing of factories, a reduction in shifts and capacity in other facilities, and a reorganisation of commercial and support functions are expected to deliver net annualised savings of around £11,, £2m higher than previous estimates.  In addition, management reviewed and reprioritised capital expenditure plans, executed a programme of surplus land disposals that generated around £7m, and focused on efficient working capital and cash management to reduce net debt … while retaining the flexibility to increase production when demand recovers. The group has significant latent capacity across all its businesses to satisfy materially higher demand than current levels”.

Outlook: “Notwithstanding the anticipated short-term challenges, the Board remains confident that the long-term market growth drivers and a focus on executing key strategic initiatives, will underpin a material improvement in profitability when markets recover.  The Board is encouraged recently by the more positive inflation trends and the consequent impact on interest rate expectations, which should support progressive improvements in the Group’s end markets during 2024”. FY results, 18 March.

Travis Perkins (TPK, 740p, £1,572m)

Leading UK builders’ merchant and owner of Toolstation. FY (Dec) trading update.

Guidance: “Trading in Q4 was delivered in line with management expectations with pricing stabilised versus Q3 but volume performance remaining challenging. Accordingly, the group expects to deliver an FY 23 adjusted operating profit of around £180m, in line with its previous guidance”.

Trading: “Given that market conditions are anticipated to remain subdued into FY 24, management has accelerated plans to continue the transformation of the business. This work commenced in Q4 with a reduction in central and regional headcount alongside efficiencies realised within the supply chain. These actions will deliver annualised savings of around £35m and result in a one-off restructuring charge of around £15m in FY 23. These initiatives represent the first steps in a programme of planned changes to the group’s operating model, which will focus on simplifying how its businesses interact with each other, reviewing the impact of loss-making activities and maximising the benefit of the group’s collective scale. Together these changes will deliver further operational efficiencies, enhance cash generation and strengthen financial resilience over the medium term. Management looks forward to updating on these initiatives at the full year results”. FY results, 5 March.

Smart Metering Systems (SMS, 900p, £1,202m)

Installs and manages smart meters and carbon reduction assets, subject to recommended cash offer by KKR. FY (Dec) trading update. Guidance: “The FY 2023 pre-exceptional EBITDA and underlying PBT are expected to be in line with the Board’s expectations”. YE net debt, £172m.

Trading: Total meter and data assets +17%, £113.4m. “Further to the announcement made on 1 December by Octopus Energy Group on the completion of its acquisition of Shell Energy Retail and the migration of SERL’s energy customers to Octopus’s systems, SMS has received a preliminary indication at an operational level from SERL that it proposes to migrate certain gas and electric meter installations under its contract with SMS to Octopus. SMS is considering this information and will continue to engage with SERL and Octopus in the coming months. We continue to see wider opportunities to support energy suppliers to deliver on their smart meter obligations (for example in more complex installations)”.

Outlook: “The Group remains confident in FY 2024 and its medium-term outlook”.

Cash offer: SMS and KKR have determined to implement the proposed acquisition by way of a recommended takeover offer rather than by way of the previously announced scheme of arrangement.

Economic data

Housing market. The latest Residential Market Survey from the RICS provides further evidence of stabilising buyer demand and pricing during December, while there were signs of some of the heat coming out of the lettings market. In Sales, the balance (% of survey reporting rise minus % reporting fall) for buyer enquiries (see below) fell narrowed to -3, compared to -13 in November and a low of -46 in June 23. There was a +1 for vendor instructions. A net -30 reported a fall in prices on a rolling 3-month basis, compared with -41 to November and -68 to August. However, actual price changes expected over the coming 12 months have declined to almost no change, while expectations of average annual over the next five years are c. +3% pa. Actual sales per office over a rolling 3-month basis have rise by 7.2%, seasonally-adjusted, to 14.9 between November and December – the highest level since September 2022, just before the impact of the mini-budget. In Lettings, the balance for tenant demand in Q4 declined to 33 from 52 in Q3, signifying continued growth but a lower rate. The decline in landlord instructions softened from -28 to -18, while rent expectations were less extreme at 53 vs 61.

Viewpoint: Improving mortgage affordability and relatively stable economic prospects, no doubt contributed to bottoming out in buyer demand – following three months of encouraging data from other sources – but, also, the extremes of rental growth and low supply may have tempted some would-be tenants back into the sales market.

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