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Home / Blog / blog / Building on a revival? || 21/02/2020

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Building on a revival? || 21/02/2020

A revival in the UK housing market, and the news that the HS2 railway line, will go ahead is boosting share prices for building companies.

Britain’s biggest builder’s merchants, Travis Perkins had its rating upgraded from analysts Citi from ‘neutral’ to ‘buy this week’. Its share price had risen just over one per cent yesterday, now standing at 1,719p at the time of writing.

Citi think that Travis Perkins, which also owns Wickes and plumbing supplies chain BSS, is well positioned to benefit from the post-election housing boom in the UK. Citi raised its target price on the stock from £17 to £19, saying that: “The positive demand dynamics support expectations for sustainable volume growth across the business with earnings benefitting from higher operating leverage.”

It also highlighted the builders’ merchant’s ‘disciplined’ management when it comes to capital allocation decisions and said it sees scope for higher returns to shareholders over the medium term.

In January, Travis Perkins announced its planned demerger from DIY business Wickes would go ahead in Q4 of 2020, after Wickes announced a like-for-like sales growth of 4.5 per cent for the final quarter of 2019.

Another recent winner in the construction sector is Kier Group, which has seen its share price almost double in a month, now standing at 144.90p at the time of writing. The big boost for Kier has been Boris Johnson’s decision to press ahead with HS2, the high-speed railway line which will connect London to Leeds, Birmingham and Manchester.

Kier had faced testing times lately, with shares crashing to their lowest level ever in 2019 and its last financial results were disappointing, leading the firm to say it had “endured a difficult year, resulting in a difficult financial performance.”

Back in June, Kier had an order book of £9.4 billion, with work on HS2 accounting for around £1.5 billion of that figure, although the construction firm said that postponement or cancellation of the project was not expected to have ‘a material impact’ on its performance.

Last April, the building firm appointed new CEO, Andrew Davies, who has been conducting a strategic review which includes improving capital allocation, cash generation and debt. It’s too soon to tell the long-term impact of Davies’s efforts although Kier’s interim results, which are due on the 5th March should give some indication of whether the firm is turning the corner.

Some analysts have pointed out though that despite the current signs of recovery, Kier’s share price has lost 85 per cent over the past two years and its price to earnings multiple of just 3.4 suggests a lack of conviction from the market about Kier’s recovery just yet.

The firm is weighed down by substantial debt, which could deter investors – in FY 2018/19, its average month-end debt was £422m.

However, the HS2 news combined with Kier’s swelling order book look like something to build on – the interim results in March should add more clarity to the chances of a turnaround for the construction giant.

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