Stockwatch: can Tory levelling-up plans boost this stock?
Construction firm could stand to gain from greater investment in the North.
16th March 2021 12:58
by Edmond Jackson from interactive investor
Sheffield construction firm could stand to gain from greater investment in the North.
It is worth being aware of a positive context evolving for the £360 million land and construction group Henry Boot (LSE:BOOT), trading at 275p currently.
Its preliminary 2020 results are next week, 23 March. It has been quite abumpy ride since I drew attention to prospects at 206p, after bumper interim results in August 2016.
The stock rallied strongly to near 340p by early 2018, then slid to 240p by September 2019, and was back up to 330p just over a year ago. The Covid-19 sell-off then dumped it back to 235p, from where it has been steadily climbing – especially since late February. If you bought earlier on, however, there has also been a circa 4% yield.
The stock trend has however been quite matched by fundamentals, where the table shows a jump in 2016 to 2017 numbers then a modest drop with earnings per share (EPS) trending slightly negative thereafter. A 13% overall operating margin is respectable for construction, land and house-building activities, albeit nearer 19% pre-2016.
Latest news affirms the levelling-up agenda
From a macroeconomic and sentiment point of view, Boot looks the type of domestic small cap able to do well as Britain’s Covid-19 vaccination programme roars on.
The Tories must also realise that, despite the next general election being three years away, they must crack on with “levelling up” to fulfil their promise to ex-Labour voters in the North. A key means of which will be infrastructure spending.
This week has started with news of a strategically important urban development for Boot, affirming one’s gut sense how Northern regeneration will be a growth theme as the UK slowly emerges from lockdown. House-building should also benefit modestly from the stamp duty holiday persisting – to help people move and take up new jobs.
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Work has started on a £42.5 million urban development scheme in Sheffield city centre. Henry Boot’s construction side was selected for the ‘Cambridge Street Collective’, a cultural/social destination, as well as ‘Elshaw House’.
The two developments, backed by Sheffield City Council, involve a 70,000 square feet new low-carbon office building and a food hall/entertainment venue – planned to become a significant landmark.
It follows last December’s acquisition of two buildings in Leeds, offering 60,000 square feet, set to be completely redeveloped at a time when significant investment is being channelled into the Mabgate area of the city.
Land disposals boosted 2020 ‘materially’ ahead of expectations
January’s update cited land disposals also resilience in the group’s development, construction and house building businesses. The timing of land disposals can obviously mean lumpy profits in a group with land trading as one of its core activities.
A boost came from disposal of an interest in a joint venture site in the Midlands, for residential/commercial development. Yet fundamentally demand for land improved, due to the housing market recovering in the second half of the year.
For what consensus forecasts are worth, they are modest anyway. Two months after this update, 2020 net profit of £13.7 million is projected relative to £37.6 million achieved in 2019, and with £20.4 million targeted for 2021 which would still be 46% below 2019.
It implies a price-to-earnings (PE) ratio of 29x, easing to 18.5x, but could easily fall if the next few years benefit from higher public spending on infrastructure.
This is a speculative view, given Boot has not specified any latest increase in its pipeline of projects beyond referring to “strong forward sales and a growing store of opportunities”.
For example, on the construction side, the ‘Glassworks’ shopping, dining and leisure scheme in Barnsley is hoped to transform the town centre.
It is why the results offer a chance to substantiate this, and investors might want to take a closer look.
Boot’s risk profile appears for example lower than Costain (LSE:COST) whose stock has also been rising in the search for infrastructure plays, but where latest results have been hit by exceptional charges on two contracts.
Operations were said to have generated “significant” levels of cash, enabling investment in Boot’s three key property markets: industrial/logistics, residential, and urban development.
The interim 2020 results had shown like-for-like cash from operations turned around from £18.2 million absorbed to £17.2 million generated. And dhat was the more challenging half of 2020. Year-end net cash has been cited as stable at £27 million, however.
Construction and house-building continued in latest lockdown
This ought to add potential to beat what seem very cautious 2021 forecasts for Henry Boot: circa £290 million revenue projected, being 24% down on what was achieved in 2019.
However, not even a range of 2020 revenues was indicated in January’s update, so again it is best to gauge the platform from next Tuesday’s results.
I am also surprised at the cautious consensus, given Boot’s development side appears to be seeing a 47% uplift – at least by way of development value – in its share of projects, the most significant being the BTR Kampus residential scheme in Manchester. Obviously, narratives can sound exciting, but revenue and margin are what count.
Encouragingly, the Hallam land management side has seen its land bank grow 11% to 16,607 acres. In house-building, Stonebridge Homes ended the year slightly ahead of target.
Recent directors’ dealings look net positive
Early last February, a senior manager did sell nearly £44,000 worth of shares at 237.7p, but you never know when personal circumstances warrant the need.
Last November, the CEO bought £100,000 worth of shares at 243.5p – allocated to himself, his wife and children – which appears a longer-term commitment. He has however been relatively recent in the role, from January 2020, having previously run British Land’s office team as well as moving its offices side towards more mixed use.
Having been an FTSE 100 board director for 13 years, overseeing large-scale developments, joint ventures, lettings and sales, his involvement coincides usefully with the government’s spending agenda – potentially to raise Henry Boot’s performance in the coming years.
Henry Boot - financial summary
Year end 31 Mar
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |
| Turnover (£ million) | 147 | 176 | 307 | 408 | 397 | 380 |
| Operating margin (%) | 19.0 | 18.0 | 12.9 | 13.8 | 12.4 | 12.9 |
| Operating profit (£m) | 28.0 | 31.7 | 39.5 | 56.2 | 49.2 | 48.9 |
| Net profit (£m) | 21.2 | 23.0 | 28.3 | 42.4 | 37.5 | 37.6 |
| Reported EPS (p) | 15.9 | 17.3 | 21.3 | 31.8 | 28.0 | 28.1 |
| Normalised EPS (p) | 15.7 | 17.0 | 21.1 | 32.0 | 28.2 | 27.6 |
| Earnings per share growth (%) | 87 | 8 | 25 | 51 | -12 | -2 |
| Price/earnings multiple (x) | 9.8 | |||||
| Operating cashflow/share (p) | 6.6 | 0.2 | 15.1 | 27.2 | 8.1 | 8.8 |
| Capex/share (p) | 1.4 | 1.6 | 1.8 | 3.4 | 1.4 | 1.5 |
| Free cashflow/share (p) | 5.2 | -1.4 | 13.3 | 23.8 | 6.7 | 7.3 |
| Dividend per share (p) | 5.6 | 6.1 | 7.0 | 8.0 | 9.0 | 5.0 |
| Yield (%) | 1.9 | |||||
| Covered by earnings (x) | 2.9 | 2.8 | 3.0 | 4.0 | 3.1 | 5.6 |
| Cash (£m) | 4.4 | 12.0 | 7.4 | 10.3 | 10.9 | 42.3 |
| Net debt (£m) | 36.4 | 38.9 | 32.9 | 29.0 | 18.4 | -27.0 |
| Net assets/share (p) | 150 | 166 | 175 | 201 | 224 | 237 |
Source: historic company REFS and company accounts
Sound balance sheet with net assets of 232p a share
This helps limit downside risk hence the attractions of putting the stock in a tax-free wrapper such as ISA or SIPP, where you cannot claim for capital losses.
Of £309.3 million net assets last June, 23% represented investment properties and 7% property/plant/equipment, with intangibles at less than 2%.
Against £58.9 million cash there was just £11.6 million debt accounting for just £208,000 net finance costs which took 4% of operating profit. Mind there is also a £36.1 million pension deficit.
Among better quality, construction-related plays
While the updates and forecasts need better numbers to justify a conviction ‘buy’, I like Boot’s spread of good quality projects (see its operational reviews for plenty more detail) and positioning in the North to capitalise on levelling up.
Who knows if the current uptick in the stock meets with post-results profit-taking. I sense current buyers have a medium-term rationale, hence: ‘buy’.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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