Construction suppliers build steady momentum

As mentioned, performance has varied across the sector - and for differing reasons. For example, plumbing and heating products supplier Wolseley (WOS) generates around three-quarters of its trading profits in the US. And although business there is bubbling along nicely - revenue grew by over 15 per cent in the three months to October - there remains the prospect of bad weather affecting housing starts and infrastructure projects, while adverse currency movements can eat away at profits. Door and window components specialist Tyman (TYMN) is another product supplier with significant exposure to the US market, where it generates around two thirds of group revenue. The top line has been boosted by a steady increase in new housing starts, while the major revenue generator - repair and remodelling work - has been affected by bad weather, mirroring a weather affected first quarter last year.

Regional variations also play a part. Trading in mainland Europe, for example, remains a hard slog as the eurozone struggles to shake off the threat of recession. Some better news may evolve here as the ECB attempts to kick-start the economy, but it could be some time before the benefits show through. And Greece may succeed in destabilising the whole picture if it fails to secure central bank blessing for a renegotiation of its debt mountain.

Trading conditions in the UK were akin to a rollercoaster ride through much of last year. A strong first quarter for builders' merchants was offset by a summer lull and a decline in the autumn, followed by a pick-up in the last two months of the year. Much of the improvement was linked to the Autumn Statement, which included another attempt to put some legs into the national infrastructure plan. The pipeline of works is worth an impressive £466bn, although it's worth remembering that around 60 per cent of this is already at the construction stage. Even so, there is considerable scope for accelerated activity in new build energy generation, national and local road upgrades and maintenance, as well as affordable housing and flood alleviation.

Trade bodies remain relatively upbeat. According to the Construction Products Association, construction growth could be as much as 4 per cent this year, with the residential sector leading the way, although the non-residential sector is also expected to continue its recovery. Builders' merchants are also expected to cash in, with the Builders Merchants Federation reporting a 10 per cent increase in volumes in the nine months to October.

There has been much debate about how events will affect the housing sector in the first half of this year, as some potential home buyers may be inclined to sit on their hands ahead of the general election. Only time will tell if there is any significant effect. However, suppliers of building products could profit if homeowners become less inclined to sell their properties, as that could flow through into an increase in home improvement receipts. Travis Perkins (TPK) has a finger in both pies because not only does it operate a string of builders' merchants, but it also owns the Wickes chain of DIY stores.

Newcomer Polypipe (PLP), which floated last April, hit the ground running with a 14 per cent increase in underlying revenue in the first half of last year. As the UK's largest manufacturer of plastic piping systems, the group has benefited from a steady increase in new housing construction. Polypipe's products are also used by homeowners to carry out plumbing improvements just after they buy a used property and just before they sell it. Demand has also been boosted by changes in government legislation governing energy usage and flood control.

In the market for aggregates, and building materials such as bricks, quarry owner Breedon Aggregates (BREE) is well placed to benefit from infrastructure spending as well as new housing construction. In addition to 450m tonnes of mineral reserves in 52 quarries, the group also operates 27 asphalt plants and 61 ready-mixed concrete plants. Trading in its Scottish operation experienced a temporary lull ahead of the vote on independence, although business is now showing signs of picking up, notably around Aberdeen.

For brick manufacturer Michelmersh (MBH), the upturn has been a long time in coming, and only after a six-year moratorium are brick prices starting to rise again. However, it has taken a long time to run down an estimated UK inventory of 1.2bn bricks stockpiled during the recession. But with demand now rising, Michelmersh has been able to push through double digit price increases. And the recent collapse in gas prices will also help to reduce energy costs significantly.

As in every economic recovery there is the risk that rising costs start to eat away at margins. Higher raw material prices and increasing wages are usually the two principal contributors here, and the time honoured reaction of pushing these costs through the chain has so far been patchy. This is because competition for new business is very strong in what remains a highly fragmented industry. On a brighter note, a sharp downward correction in commodity prices has at least helped to keep some of the inflationary elements in check.

IC View: Suppliers have waited a long time for the economic recovery to bolster previously denuded order books. The outlook certainly looks brighter, but headwinds remain, notably weakness in Europe, a looming general election, and potential disruption caused by bad weather in the US. Overall though, the sector should deliver steady growth, with the prospect of accelerated returns as the US and UK economies continue to recover.

Favourites

Picking a winner from an improving bunch is not straightforward, but door and window components supplier Tyman has its fortunes clearly tied to the US housing, repair and remodelling sectors, where there is significant growth. As always, the caveat here is that bad weather can hold back almost everything. In the UK, which accounts for around a quarter of group sales, operational gearing is helping to boost margins, while the group continues to increase its market share. Trading on 14 times 2015 forecast EPS, and with 17 per cent earnings growth forecast for this year, there is still room for share-price upside.

Outsiders

Building component suppliers will benefit from the stronger economy in the UK, but those with a significant exposure to mainland Europe face more of an uphill task. Insulation specialist Kingspan (KGP) pushed group sales ahead by 5 per cent in the nine months to September, but sales of insulation panels and boards in Europe remain weak. Further uncertainty has been generated by the Greece situation, which will only add to the sombre mood, and, crucially, the core German market has weakened. Elsewhere, the access floors division saw sales down 4 per cent in the first nine months, although there was something of a comeback in the third quarter where sales recovered. However, trading on a pretty punchy 27 times forecast earnings, the shares look vulnerable.