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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September 20, 2023

SPR, GFRD, HERC, KINO | Economy – Surprise inflation fall fuels rate hopes; Shorter-term mortgage rates fall; House price inflation eases again, ONS

Company research

Springfield Properties (SPR, 61p, £72m mkt cap) – SPR is a client of PERL

Springfield Properties (SPR, 61p, £72m mkt cap) – SPR is a client of PERL

Scotland’s only quoted housebuilder. FY (May) results. Progressive Equity Research note, Focused on cutting debt in uncertain market:

“Springfield’s FY results to 31 May were in line with its July update guidance, a resilient performance amid challenges, in our view. Following the update, we stated we would review our FY24E estimates in light of guidance at the results. This remains cautious and the Group is now focusing squarely on cutting debt by realising value from its quality landbank. We do, however, believe there could be upside from a revival in affordable housing.”

Galliford Try Holdings (GFRD, 208p, £214m)

UK construction and infrastructure services group. Final (Jun) results. Rev +13%, £1,394m; divisional operating margin, 2.4% (FY 22, 2.4%); adj PBT +23%, £23.4m; stat PBT +87%, £10.1m (after previously announced cloud computing upgrade costs of £10.5m and £2.8m contract settlement write-off); adj EPS +18%, 18.9p; div +31%, 10.5p; net cash, £220m (FY 23, £219m); ave month-end net cash, £135m (£174m).

Trading: “Strong performance across all operations”. Building – rev +1.0%, £797m; adj margin, 2.3% (2.4%); op profit -2.1%, £18.5m; orders +9.9%, £2,249m. Revenue steady “despite some delays to new contracts towards the end of the financial year, reflecting increased length of client procurement in response to rising inflation and some public sector delays. The margin change reflects the challenging macroeconomic conditions through the financial year, and we remain on track for our 2026 targets”. Infrastructure – rev +34%, £591m; adj op margin, 2.5% (2.4%); op profit 34% £14.5m; orders +4.9%, £1,464m. “As expected, revenue increased due to the higher level of activity from the AMP7 programme in the water sector and the first full year of trading following the acquisition of the acquired water operations of nmcn plc (in administration).  The improved profit performance is in line with our expectations, and includes the benefit of new contract frameworks. During the year the group acquired the water businesses of MCS Control Systems and Ham Baker providing further geographic scale and increased capabilities in the water sector”. PPP Investments – directors’ valuation, £44.6m (£47.5m).

Outlook: Orders +8.8%, £3.7bn. FY24 adj PBT “expected to be at the upper end of the current range of analyst estimates [£24.0 – 28.0m]. Increased confidence in our target divisional operating margin [Building and Infrastructure] of 3% by 2026”. Improved annual dividend policy of 1.8x cover (previously 2.0x.

Hercules Site Services (HERC, 27p, £17m)

Technology enabled labour supply company for the UK infrastructure sector. Contracts. The Civils Projects division has been awarded contracts with a combined value of over £3.1m since 1 May 2023 to deliver critical work for two major clients relating to nine wastewater treatment and water management projects: £2.3m from Thames Water across six sites; and £0.9m from Anglian Water across three sites.

Kinovo (KINO, 53p, £33m)

Property services provider, formerly Bilby, specialising in compliance and sustainability. Statement regarding Rule 2.8 announcement by Rx3 Holdings. “The Company notes the announcement released yesterday by Rx3 Holdings stating that it does not intend to make a firm offer for Kinovo .. and Kinovo is no longer deemed to be in an Offer Period. As announced on 1 September, the Directors concluded that if the possible offer of 56p per share was made by Rx3, the Board would not recommend it to shareholders. The Directors would emphasise that no improvement in the offer price was either discussed or offered by Rx3 following the Board’s rejection of the Possible Offer Price. Given the Board’s view that the Possible Offer Price was at an unsatisfactory level the Directors did not believe it was appropriate to allow Rx3 to undertake due diligence. The Directors note the comments by Rx3 on the DCB projects. The projects were specifically addressed in the Company’s full year results which were published on 11 July. The Company intends to release a trading update on its performance for the six months to 30 September in early November, and can confirm that this is expected to be in line with expectations. The Board remains confident about the prospects of Kinovo”.

Epwin Group (EPWN, 69p, £100m)

Low maintenance building products manufacturer. HY (Jun) results. Rev +1.1%, £180m; adj PBT +4.8%, £8.7m; stat PBT unch, £7.9m; adj EPS +3.0%, 4.82p; interim div +5.3%, 2.0p; net debt, £16.1m (HY 22, £7.3m).

Trading: “Raw material cost inflation has continued to ease, although PVC resin prices remain at elevated levels; labour, energy and other inflationary cost pressures continue to be managed carefully. Good progress delivering on our strategy of operational improvements, new product development and value-enhancing acquisitions. Outlook: “Q3 trading to date has been encouraging with profitability ahead of 2022. RMI demand has remained robust into H2 2023, with trading in core markets remaining resilient. The group’s broad product range, diverse customer base, well-invested operations, flexible cost base, longstanding supplier relationships and strong balance sheet provide a large measure of resilience against the potential effect of short-term macro-economic headwinds. The Board remains confident of delivering a 2023 result in line with market consensus [£24m] – demonstrating continued delivery against rising post-Covid market expectations. Medium and long-term drivers for the Group’s markets remain positive”.

Economic data

Inflation. Housebuilders’ shares performed strongly this morning, rising some 4 – 6% (with banks and property companies not far behind) following better than expected inflation data from the ONS. The headline Y/Y CPI rate slipped to 6.7% in August, from 6.8% in July, but better than the rise to 7.1% predicted by economists, fuelled by higher petrol prices. Possibly more importantly, core inflation (excluding energy, food, alcohol and tobacco) fell from 6.9% to 6.2%, against consensus of 6.8%; this is one of the key measures that the BoE Monetary Policy Committee will probe when coming to its decision tomorrow (at midday) on whether to raise rates by 0.25% or keep them at 5.25%. Last night the betting indicated there was a 90% chance of a rise; now it’s reportedly less than 50:50.

Viewpoint. It could well be a pause tomorrow; if not, the last rise.

Mortgage rates. Further evidence of an improvement in shorter-term rates sentiment was provided the latest Weekly Tracker from Rightmove. After seven consecutive weeks of decline in five-year fixed rates, across 85%, 90% and 95% LTV products, last week so only limited falls. However, spreads between those and two-year fixed mortgages narrowed. According to Rightmove: “Today’s surprisingly positive inflation news will likely give the Bank of England more confidence heading into tomorrow’s Base Rate decision. While markets predict and have priced in a 0.25% rise, which is still tomorrow’s most likely outcome, today’s news means further rises beyond this are now a lot less likely. Today’s news means it is likely that confidence will continue to increase amongst lenders in the coming weeks with the trajectory of rates remaining downward. The Bank’s accompanying commentary on the economy to tomorrow’s decision will likely have further impact on the direction and pace of change in mortgage rates in the near future”.

Average mortgage rates, 5-year and 2-year fixed (%)

House prices. The rate of UK house price inflation fell to +0.6% in July, from a revised +1.9% in June, according to the latest data from the ONS. The average UK house price was £290,000. £2,000 higher than 12 months ago but £2,000 below the recent peak in November. Prices increased by 0.6% to £309,000 in England; 0.1% to  £192,000 in Scotland; Wales declined 0.1% to £216,000; +2.7% to £174,000 in Northern Ireland. The North East saw the highest annual percentage change of all English regions in the 12 months to July 2023 (+2.7%), while the South West was the weakest, (-1.0%). The ONS covers cash cash transactions as well as mortgaged sales and is calculated at the completion of sales, unlike the two other main indices from the Halifax and Nationwide, which are based on initial mortgage offers – so is a more accurate but backwards looking measure.

Annual house price rates of change for all dwellings, UK, January 2006 to July 2023

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

This communication is provided for information purposes only, and is not a solicitation or inducement to buy, sell, subscribe, or underwrite securities or units. Investors should seek advice from an Independent Financial Adviser or regulated stockbroker before making any investment decisions. Progressive Equity Research Ltd (“PERL”) does not make investment recommendations.

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.