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Opinion: Chris Wright
New brooms looking to sweep up deals
As George Osborne is only too ready to tell us, his plan is working and both the economy in general, and construction in particular, is on the up.
Whilst this appears to be the case, it is still relatively embryonic and polluted by government (and Bank of England) fiscal policy, not least the much discussed Help to Buy scheme. Certainly, in the lead up to the summer break, the major builders merchants were still being circumspect in their M&A focus.
Deal activity continued to linger at post recession lows and where there was activity, it tended to be opportunistic and on the small side. For example, SIG acquired volume in the HVAC and roofing segments, Grafton acquired Thompson Building Centres from administration and Wolseley took the plunge and secured the pieces they wanted from Burdens. It was only Travis Perkins’ acquisition of solar energy specialist Solfex that could be labelled as strategic.
However, recent investor presentations and earnings calls, together with our discussions with the key players (see my colleague Keith Pickering’s blog) have suggested the focus has moved from self help measures to M&A opportunities.
So what happened over the summer?
Alongside the general upbeat economic news, we have seen management changes happen, or become embedded, at most of the major merchants and the self help measures deliver cash on to balance sheets. These latter two factors, as much as activity levels, will lead to a new round of growth by acquisition. The “new” boys at the helm, Gavin Slark at Grafton with two years under his belt and the more recent CEO and CFO changes at SIG and TP, will not want their CV legacies to be “we couldn’t think of anything to do with the cash so we had to pay it back to shareholders.” Wolseley has already taken this route, returning £300 million to shareholders through a special dividend, others may need to follow in the short term to keep their share price trend comparable. However, in the longer term, they will be hunting for acquisitions.
What they will be looking for, and whether that hunt becomes a competition and, therefore, drives prices upwards, remains to be seen. However, good businesses in the construction and building products supply chain can certainly put “Exit Strategy” back on the Board agenda as a realistic proposition.
Construction sector not as sick as it seems
It may be silly season in the national press at the moment as they scramble for stories to fill the pages but the summer months provide the latest reporting and insight in to the health and performance of many of our listed construction companies. The interim reports make mixed reading.
Whilst the house builders buck the general economic and sector specific trends, disclosing improving revenues, margins and order books, and negating the need to cite poor weather and a lack of government help to explain further lacklustre performances to the city, delve a little deeper and there remain signs that the sun isn’t shining quite so brightly for them too.
The first half of 2012 has seen an end to the stamp duty holiday (for homes with values between £150,000 and £250,000) and effects of the implementation of the government backed FirstBuy scheme, both driving temporary activity increases in a depressed market place. Although NewBuy replaces FirstBuy and this should help our house builders, first time buyers are still finding times tough.
Furthermore, large geographical discrepancies in performance predominate. Demand in London and the South continues to drive the reported improvements in average selling prices and volumes whilst the Midlands and the North weigh a burden on company performances. Will we see increased competition in the South and falling margins as everyone scrambles for the same attractive plots? Land expenses are already forming a greater proportion of cost of sales in some house builders’ accounts.
For the consumers, stagnant wages, economic uncertainty and poor mortgage availability for first time buyers all prevail, with few signs of improvements in the near future – rain could still return and fall on the home building market too.
However, confidence (or humour!) within the sector appears not to be completely lost. Persimmon announced bold intentions to return £1.9bn of surplus capital to shareholders over the next 9 years, commencing with a 75 pence per share payment in June 2013. This equates to a £227m payment, almost double the cash reserves reported on their balance sheet for 30 June 2012.
Let’s hope mortgage availability and the NewBuy scheme fuel housing affordability otherwise there could be some angry shareholder knocks on Persimmon’s front door.