The FTSE 250 index was buoyed by news that Boris Johnson had managed to find agreement on a withdrawal deal with the European Union (EU), but not every index constituent was moving in the right direction.
Building materials firm Grafton Group (GFTU) warned that its annual profit would miss expectations, as trading faltered through the third quarter. Unfortunately, it hasn’t picked up since the end of September, so the group now anticipates “full year operating profit for continuing operations in the range of 4-8 per cent lower than current consensus” which stands at £206.4m (post IFRS 16 relating to lease accounting).
Share prices for industry peers such as Travis Perkins (TPK) and Howden Joinery Group Plc (HWDN) also came under pressure, as further evidence mounted that the construction sector is in the midst of a cyclical downturn. The latest IHS Markit Construction PMI fell to its lowest level in a decade at 43.3 for September, down from 45.0, a reflection of declining volumes in civil engineering and residential construction. (A number above 50.0 indicates industry expansion).
Industry figures have blamed the impasse over the Brexit negotiations for a fall-away in activity, so it will be interesting to note whether volumes recover if we have arrived at some sort of political resolution, though the default position on Brexit glosses over structural problems which are stymieing activity such as skilled labour shortages and relatively low productivity in the sector.
Industry bodies, in general, have been warning about the threat to aggregate demand from a no-deal Brexit, but membership of the EU can entail heightened regulatory risk. It’s worth noting that like-for-like revenue growth in Grafton’s Irish and UK businesses outstripped its Netherlands operations, a partial consequence of a May ruling by the country’s highest administrative court that the Dutch building industry has been in breach of European law linked to nitrogen emissions.
Though the full implications arising from the judgement aren't clear, thousands of construction projects have already been put on ice. Presumably, the issue will take some time to play-out, leading to a reduction in activity within the Dutch merchanting market, though it's too early to gauge what impact, if any, this will have on Grafton's top-line beyond 2019.
