The perennial promise of more spending on the UK’s creaking infrastructure may be about to be turned into reality. An extended Heathrow has been approved, subject to a parliamentary vote, and so has a new power station at Hinkley Point. More incentives are expected to percolate through the system to boost housebuilding, as well as further investment in rail and telecommunications. The UK government has committed itself to spend up to 1.2 per cent of GDP on economic infrastructure from 2020, compared with 0.8 per cent at the moment. Its national infrastructure delivery plan covering 2016 to 2021 has identified a pipeline of projects worth around £480bn.
This will ultimately be good news for the likes of ground engineering specialist Keller (KLR), as well as Kier (KIE) and Balfour Beatty (BBY), the latter finally resolving a series of legacy issues that led to a string of profit warnings. It’s already good news for Travis Perkins (TPK) and Marshalls (MSLH), as suppliers of building materials for the busy housebuilding sector. Travis Perkins has been refurbishing a number of its outlets and has achieved decent growth in retail, but the plumbing and heating division continues to underperform amid tough competition. What’s more, outside housebuilding the company has retained a cautious outlook for the coming year, announcing plans to close 30 branches.
Other suppliers such as Wolseley (WOS) and CRH (CRH) enjoy the added benefit of generating a significant proportion of group revenue from the US. In fact, Wolseley generates close to 90 per cent of its turnover from outside the UK, which helps to explain why shares in both companies were up by more than a third in 2016.
Brickmaker Ibstock (IBST), which floated in October 2015 and has around 40 per cent of the UK brick market, is still licking its wounds after market panic saw the share price slashed in the aftermath of the EU referendum. The shares recovered some of this price drop, but remain subdued even though the concerns about the housing industry have been wide of the mark. Business in the coming year is expected to be supported by the end of destocking by builders’ merchants, while output will be increased with the completion of a new facility that will add 13 per cent to current brick capacity.
| Price (p) | Market value (£m) | PE (x) | Yield (%) | 1-year change (%) | Last IC view | |
| Balfour Beatty | 273 | 1,882 | 160.5 | 0.3 | 12.8 | Buy, 262.6p, 17 Aug 2016 |
| CRH | 2,811 | 23,407 | 28.1 | 1.9 | 60.4 | Buy, 2,751p, 21 Nov 2016 |
| Grafton | 597 | 1,411 | 16.3 | 1.8 | -10.4 | Hold, 561p, 31 Aug 2016 |
| Howden Joinery | 382 | 2,399 | 13 | 2.7 | -21.1 | Hold, 424p, 21 Jul 2016 |
| Ibstock | 176 | 716 | 11.2 | 2.7 | -16.6 | Hold, 153.3p, 8 Aug 2016 |
| John Laing Group | 263 | 964 | 5.4 | 1.9 | 27.8 | Buy, 271.4p, 29 Sep 2016 |
| Keller | 831 | 598 | 10 | 3.3 | 6.3 | Hold, 936.5p, 1 Aug 2016 |
| Kier | 1,370 | 1,334 | 12.8 | 4.7 | 11.4 | Buy, 1,301p, 27 Sep 2016 |
| Marshalls | 283 | 564 | 17.5 | 3.1 | -8.5 | Buy, 316p, 30 Aug 2016 |
| Polypipe | 334 | 662 | 14 | 2.6 | 2.7 | Buy, 294p, 16 Aug 2016 |
| SIG | 105 | 623 | 8.5 | 4.5 | -20.9 | Hold, 108.1p, 9 Aug 2016 |
| Travis Perkins | 1,475 | 3,699 | 11.9 | 3.0 | -18.2 | Hold, 1.541p, 3 Aug 2016 |
| Wolseley | 4,967 | 12,561 | 20 | 2.0 | 50.7 | Hold, 4,156p, 27 Sep 2016 |
Favourites: Kier is well placed to exploit the mixed tenure side of the housing market, an area with major barriers to entry due to financing, construction and maintenance considerations. Kier has around 4 per cent of the mixed tenure market, and this is expected to grow. There’s a decent dividend, too. The group is also now benefiting from a contribution from the Mouchel acquisition, bolstering its services segment. More than 90 per cent of targeted revenue for 2017 has already been secured.
Outsiders: The push on infrastructure spending is likely to be beneficial all round. At materials distributor Grafton (GFTU), however, the Buildbase and Plumbase merchanting brands – which generate the vast majority of group revenue – continue to experience pricing pressures in a competitive trading environment. On a sector basis, the dividend payout is relatively modest, too.
