Galliford. Why the persistent drift?

2nd Nov '17 by TangoDoc

6 comments 3983 reads

My portfolio as overly subscribed to builders and they had all risen very well. October was approaching and it looked as if there might be at the very least, a cooling of enthusiasm. There was talk of house prices going down, Polish tradesmen going home and a general air of Brexit doom and gloom. Accordingly, I severely reduced my holding in builders, banking a very tidy profit, it must be said. All well and good.

The builders did not slump as they had a year ago, temporarily. I missed that boat in 2016. The builders carried on rising. "Never mind" quoth I, "it will soon enough end in tears and I will get back in". Not a bit of it. However, two of them, Galliford and Barrett were about to go ex dividend on October 26th. Which way to go? Should I buy back and take the divi, notice the loss on the day but the steady recovery, or, should I guess that the slump after the div would be more than the amount of the div and buy back at an ever higher discount?

My preference was for Galliford so I bought back at a modest discount to the price I had obtained some weeks before. Wrong! Barrett fell less than the div amount and, as if to annoy me, continued to rise. Galliford, on the other hand, fell more than the 64p div and has continued to slide ever since.For some reason, it is the only builder to do this. Why? I can find no online evidence to indicate why there is a general desire to dump Galliford or, conversely, why Barrett in comparison is so very desirable the world and his wife simply must have some.

It'll all be OK in the long run and I'm still sitting on a load of cash in anticipation of good buying times not far ahead and still glad I have a holding in a company I respect. I would just dearly love to know what information marks Galliford out as different right now. What have I missed? Ideas?

Unlock with Email

Unlock with Google

Already have an account?
Login here

rhomboid1

2nd Nov '17

Maybe It’s the Carillion effect, Galliford Try (LON:GFRD) construction arm has already owned up to a number of problem contracts , it looks as if large holders believe the cockroach theory and suspect there are more issues in the business, why risk buying when there are other clean pure plays on House building at cheap valuations?

Howard Marx

Global economic growth is in a sweetspot right now.

However, growth in the UK has peaked. (*)

From here, the best that can happen in the UK is a slowdown. The worst, a slump. Either way the outlook for UK cyclical stocks (such as Galliford Try (LON:GFRD) ) is far from good.

No surprise that currently the majority of poorly performing UK stocks are cyclicals:

(*) http://www.bankofengland.co.uk...

TangoDoc

3rd Nov '17

That's fine util you compare the annual charts of Galliford with Henry Boot and Costain where it seems clear that similarities diverge perhaps after April. Is it the General Election debacle and Galliford's involvement in PPP? After all, their Linden Homes division is just like Barrett or Persimmon I would have thought.

JamesrWilson1989

17th Feb '18

I'm a buyer at these levels and I'll try and set out my reasons below. Please give me both barrels if you don't agree - I like people who have different opinion than myself as I think it makes us all better investors than head in the sand.

Current Market Cap - £723M (+Debt of £84M or £203M depending on what figure you want.)

Big decrease in price due to raising £150M due to legacy issues and Carillion's demise. Issue is therefore in the construction team and looking at the figures,
net cash within this department fell from £110M to £44M. Therefore, I think it makes sense to raise cash from shareholders to maintain a healthy cash surplus in this area and avoid any cashflow issues in the future. Short-term pain to ensure we avoid and nasty jolts later on in the road. Should also be said that net debt across the business fell from £113M to £84M which looks good. Average net debt of £203M as opposed to £231M debt last year. Pension deficit is only £2.3M so not worth worrying about.

Dividend cover of 2.0x is sensible approach and ensures we benefit as well as ensuring that debt figure is reduced over time.

Now - this is now down to how much do you trust management moving forward.In my opinion pre-exceptional is only valid if it's one off costs.As you'll see below - one-off isn't every year.

2017 Profit - £58M (£147M pre-exceptional)
2016 Profit - £135M (157M pre-exceptional)
2015 Profit - £117M (138M pre-exceptional)
2014 Profit - £94M (£110M pre-exceptional)

2017 is obviously the stand out year due to legacy contracts and looking at the 2017 report we have:

Chief Executive "Construction’s markets were also generally positive during the year,with the government and regulated bodies continuing to spend on construction and infrastructure.However,the business was held back by legacy contracts, primarily
two major infrastructure joint venture projects.These legacy contracts were
secured in a more challenging economic environment for the construction sector.
After a thorough review of costs to complete and expected recoveries,
we announced a one-off charge of £98.3 million in our trading update in May.
We are no longer undertaking similar large infrastructure contracts on fixed-price
terms and there are no other similarly procured major projects in our portfolio."

The two legacy contracts are: Queensferry Crossing (completed) and Aberdeen Western Peripheral Route (on-going).

SO to conclude, the legacy contracts have destroyed shareholder value but the end is in sight and believe lessons have been learnt. Management have done the right thing in raising capital so other the other sub-sectors (re-generation & Linden Homes)resources are taken away.

Therefore, the problems are temporary and are fixable. After this, the business should be making circa £140M profit, with reducing debt. In my opinion I can see value of the business are circa £1.2BN, which would indicate 50% rise in share price.

With all these decisions there are of course risks, other legacy contracts coming out and an economic crash, house prices falling etc. However, as management have indicated, have signed any further fixed-cost contracts and the potential upside is worth the risk.

michael1962

12th Mar '18

Dear James, thank you very much for your insightful analysis. I was umm-ing and ahh-ing about buying into Galliford Try. Having done all of the research, I sort of came to the same conclusions as you but was fumbling with the decision. I bought in today, had i listened to you a little earlier I'd have benefitted from the 8% rise over the weekend. Anyway thanks again for the articulate analysis, it tipped me over, I promise not to blame you when it goes differently to our expectation.

Welcome aboard Michael.

I think anything sub £10.00 is a good buy in my opinion.

The reason why its depressed is due to two reasons in my opinion

1) Pre-exceptional items and whether these are one-offs or just the norm in a construction business (I believe that Galliford Try (LON:GFRD) signed upto poor contracts when it was a tougher market out there. They've made numerous references in the latest annual report that now they stay clear from fixed-price infrastructure projects which has caused the most damage)

2) £150M rights issue needed to resolve the pre-exceptional items in point one, without pulling resources away from the other business disciplines (re-generation & bashing out new-build housing).

When looking at profit warnings, it's very dangerous in catching the failing knife. I believe Galliford Try (LON:GFRD) has sacrificed shareholder value during the recession by signing up to bad deals just to keep the wheels turning. I think these are finally being put to history by the business and now they can focus on enhancing value from here.

Galliford. Why the persistent drift?

Unlock the rest of this article with a 14 day trial

About the Author

TangoDoc

6 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...