Support Group | finnCap Support Services quarterly sector note

Support Group | finnCap Support Services quarterly sector note

finnCap Support Services topic of the quarter. The housebuilding sector has been a bright spot in the construction and support services sectors. The outlook for volumes remains good but concerns over quality and build costs suggest margins could come under pressure. Supported by the Government’s Help to Buy scheme and the continued undersupply of housing in the UK, housebuilders and suppliers in the sector continue to report positive outlooks. Most recently, Bellway reported a 8% rise in EPS, pre-tax ROCE of 24.2% and gearing of <1%, and it said that trading in the first six weeks of the new year had been strong. These are familiar themes in the sector. Henry Boot announced that it had invested in its management team to support the anticipated growth in its small housebuilding business and that its larger land promotion business had traded strongly as its housebuilder customers achieved strong sales and replenished their land banks (a sure sign of confidence). Fulcrum (utility connections) said that a relatively buoyant housing market had led to a large volume of housing projects secured and delivered in H2. There is change coming though. The Times has reported that the government is reviewing Persimmon’s participation in the scheme due to claims of poor quality and unfair lease clauses. Persimmon recently launched a ‘Customer Care Improvement Plan’. The Secretary for State for Housing, Communities and Local Government has stated that he will be considering carefully how the developers who work with the Government meet the standards and quality that customers expect and deserve. So while the outlook for volumes remains good given the importance of government support (since 2013 0.5m completions have used one or more Help to Buy schemes), there must be a question mark over industry margins. For some housebuilders, there will be an additional cost for improved quality and, separately, Taylor Wimpey has highlighted higher than expected cost inflation. This may in turn put pressure on the wider supply chain. We are about to find out which suppliers can hold their prices based on strong market positions, differentiation and (most of all) quality of service or product.

Authors: Guy Hewett  ghewett@finncap.com   

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