The market value of Lakehouse (LAKE) halved earlier this week, after it revealed that increased budgetary constraints within its housing association clients fed through into fewer contracts than anticipated, together with increased margin pressure. With discretionary spending on the wane, the support services group warned that profits for its Regeneration and Energy Services divisions will be materially below expectations.
Procurement linked to the domestic smart meter roll-out – an important plank of Lakehouse’s growth strategy – has also been negatively affected by the budget squeeze. Consequently, Lakehouse no longer expects this business segment to make any meaningful contribution during this financial year.
It’s less than a year since Lakehouse began trading and less than two months since it delivered its maiden full year results as a listed entity, so there are bound to be questions why the reduced contract load wasn’t flagged-up within a post period-end addendum. Presumably the full effects of the budgetary constraints hadn’t come to light by the second week of December, but the timing of the announcement has not gone down well with some investors.
It also won’t have gone unnoticed that the profit warning stands in contrast to a solid pre-close update delivered by industry peer Mears Group (MER) midway through last month. A key feature of the Mears’ update was the predictability of its top-line, with 94 per cent visibility of the market consensus revenue forecast for 2016.
Though Lakeland bumped up the number of its framework contracts by over a fifth since the start of the year, doubts will linger as to whether remits from these arrangements will come under increased pressure due to changes in social housing legislation announced last July. From April, social landlords will be obliged to reduce rents by 1 per cent annually over the next four years, leading to an estimated 12 per cent reduction in average rents by 2020/21. The change to the rental formula raises serious questions over housing association cash-flows and the ability of landlords to adequately fund commitments under existing framework agreements. Further down the track the industry is also faced with the potential loss of at least 80,000 social rented homes by 2020 unless councils are given greater powers to build new homes, according to recent analysis from the Local Government Association.
