Construction companies and material suppliers started 2015 on a generally positive note and made decent progress in the first quarter, although shares in many spent the rest of the year giving back the earlier gains. It was, in short, another year of what might have been.
The crucial repair, maintenance and improvement market remained stubbornly benign thanks to a combination of financial constraints on local authorities and a preponderance of consumers endowed with short arms and long pockets: not least because most of the first half of the year was overshadowed by pre-election jitters. Despite this, a slim majority ended the year sporting gains, led by Balfour Beatty (BBY), its shares up an impressive 27 per cent. Although it's fair to say that Balfour has had a bit of catching up to do, having previously issued a string of profit warnings related to underpriced legacy contracts.
However, the sector as a whole has received a key pillar of support from the government's pledge to boost infrastructure spending, which should be supportive for the likes of Carillion (CLLN) and Kier (KIE). Furthermore, it can only be a matter of time before consumers start to buy more decking for their newly constructed patios, which would help Travis Perkins (TPK) and CRH (CRH). The latter is also underpinned by its expansion into the US market.
But it would be unwise to expect any fireworks, with a long and low growth profile seen as the most likely path. And even this could be materially affected by macroeconomic events encapsulated in a recent warning from chancellor George Osborne on the "cocktail of threats" facing the UK economy. Those companies keeping a tight hold on the purse strings and pursuing a policy of self-help will weather the generally benign environment the best.
What sets Wolseley (WOS) apart from the rest of the pack is the fact that the heating and plumbing supplier generates 90 per cent of its turnover outside the UK. Nearly two-thirds of group turnover comes from the US where business was generally promising in the commercial and residential markets, but offset by weaker industrial markets, which account for around 15 per cent of US revenue. Geographical diversity has its plus and minus points, with the UK arm subdued while revenue from the Nordic region continues to improve. One factor currently going in the group's favour is the sharp fall in sterling; this is likely to boost dollar-generated profits.
| NAME | Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change (%) | Last IC view: |
|---|---|---|---|---|---|---|
| BALFOUR BEATTY | 244 | 1,686 | NA | 2.3 | 18.6 | Hold, 244p, 12 Aug 2015 |
| CARILLION | 280 | 1,205 | 8.0 | 6.4 | -18.3 | Buy,310p, 13 Oct 2015 |
| CRH | 1,823 | 15,005 | 31.6 | 2.5 | 17.1 | Buy, 1,872p, 28 Aug 2015 |
| GRAFTON GROUP UTS. | 674 | 1,584 | 23.3 | 1.7 | 4.4 | Hold, 714p, 28 Aug 2015 |
| HOWDEN JOINERY GP. | 493 | 3,165 | 20.8 | 1.9 | 20.1 | Hold, 490p, 19 Aug 2015 |
| IBSTOCK | 207 | 840 | NA | 0.0 | NA | NA |
| JOHN LAING GROUP (WI) | 206 | 754 | 13.5 | 0.9 | NA | Buy, 210p, 31 Dec 2015 |
| KELLER | 795 | 571 | 10.3 | 3.2 | -14.0 | Buy, 1,054p, 4 Aug 2015 |
| KIER GROUP | 1,219 | 1,170 | 12.7 | 4.5 | -3.9 | Buy, 1,439p, 4 Aug 2015 |
| MARSHALLS | 302 | 602 | 24.1 | 2.1 | 27.7 | Buy, 334p, 18 Sep 2015 |
| SIG | 131 | 773 | 11.4 | 3.6 | -24.5 | Buy, 194p, 5 Aug 2015 |
| TRAVIS PERKINS | 1,820 | 4,547 | 15.2 | 2.2 | -1.7 | Buy, 2,180p, 5 Aug 2015 |
| WOLSELEY | 3,367 | 8,592 | 14.6 | 2.7 | -9.2 | Hold, 3,685p 30 Sep 2015 |
Favourite
Shares in ground engineering specialist Keller (KLR) have been driven lower despite a very strong performance in the US, where it generates two-thirds of its profits. A contraction in shale and commodity-related work has made life tough in Canada and Australia, but trading on less than 9 times forecast 2016 earnings, the shares are looking cheap.
Outsider
Builders' merchant and DIY specialist Grafton (GFTU) derives around a fifth of its earnings from a strong Irish market, and overall profits showed solid growth in the first half. It's hard to pick an outsider approaching the sector on a long-term basis, but with a meagre dividend and its shares trading on 17 times forecast earnings, the growth profile looks factored in.
