FTSE 350: Construction materials eyes slow recovery

Based on the most recent purchasing managers survey, investors may need to temper their expectations. 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.

Aside from the fact that there is likely to be some lag effect in new projects being commissioned, particularly within the commercial sector, there is also still an element of uncertainty over the terms of any trade deal that is negotiated with the EU, which could continue to weigh on PMI activity, according to economists at IHS Markit.  

Yet some groups are entering 2020 in a better position to withstand any lingering hesitancy among commercial contractors and households. 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, after the decline in domestic sales suffered during September and October steadied as the year drew to a close. By contrast, roofing and insulation specialist SIG (SHI) has issued two profit warnings over the past 12 months, the latest revealing an acceleration in the downturn in UK distribution sales during the final two months of 2019.