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Outlook for UK construction remains dim

Consumers and companies have continued to take a cautious approach to spending
January 15, 2020

UK construction is a precarious market to be operating in, as activity has been stymied by political and economic uncertainty. Yet, fourth-quarter trading figures from two of the UK’s largest building materials suppliers indicate that some parts of the market are continuing to prove more resilient than others.

SIG (SHI) lost a fifth of its market value in one day after warning that underlying pre-tax profits for 2019 would be below market consensus expectations. The roofing and insulation specialist, which primarily caters to the commercial market, said that the deterioration in trading in September and October had accelerated in the final two months of the year. 

Like-for-like (LFL) sales in the UK and Ireland declined by almost a fifth during the second half of the year, resulting in group sales in 2019 falling 6 per cent.  

Yet Grafton (GFTU), which sells materials predominantly to trade customers engaged in residential repair, maintenance and improvement (RMI) projects and housebuilding, surprised the market by raising adjusted operating profit guidance for 2019. 

The FTSE 250 constituent said that while the market weakness of September and October had continued throughout the remainder of the year, the rate of sales decline had steadied. That meant that while the supplier suffered a 4 per cent reduction in UK merchanting sales during the fourth quarter, group LFL revenue over the whole year grew 1.9 per cent.      

In December, the IHS Markit/CIPS UK construction purchasing manager’s index (PMI) dropped to 44.4, its lowest level since the aftermath of the financial crisis a decade ago. Any reading below 50 represents a contraction in purchasing activity and indicates that future construction output will also decline.

Purchasing activity within the commercial construction market suffered the worst decline. That was not only due to corporate reluctance to spend on new office, retail and industrial developments, said IHS Markit chief business economist Chris Williamson, but also a lack of big infrastructure projects from the government. “What’s going to be the next Crossrail, for example?” he asked.  

Yet, investors hoping that the election of a governmental majority will give way to a sharp rebound in fortunes across the industry this year may need to temper their expectations as Brexit negotiations continue. While companies said they expected construction output for 2020 to increase, said Mr Williamson, it is likely 2020 will be a “steady year, but not an exciting year”. 

“We don’t think it’s going to be boom times for the UK economy, there’s still an awful lot of uncertainty,” he said. 

Despite posting a decline in December, supply purchasing activity within the new residential building market was the most resilient part of the UK market. “That is a symptom of high employment levels, but super-low borrowing costs,” says Mr Williamson. 

In addition to Grafton, a more resilient housebuilding market also bodes well for companies including piping manufacturer Polypipe (POLY), which makes more than half its revenue from selling directly to residential developers. 

While RMI activity, which traditionally benefits from a buoyant level of housing transactions and consumer confidence, was weak last year, the “more reactive” ability of those carrying out smaller projects means that the segment could be quicker to rebound in the event of greater political and economic clarity, said Goodbody analyst David O’Brien. 

Construction comparitives

NamePrice 3-month change (%)1-yr change (%)3-year change (%)1-year EPS change (%) Forecast PEForecast EPS 1-year (%)
Grafton  902.5p5.5624.75420.315.2-10.4
Howden Joinery  689.7p19.145.5814.720.18.3
Polypipe 522.5p17.342.156.14.517.82.1
SIG 95.975p-11.5-18.5-11.98.114.2-28
Travis Perkins 1,629.5p13.440.411.24.714.8-4.2
Source: SharePad      

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