The UK construction and building materials sector is cheap and will benefit from economic recovery, ...
The UK construction and building materials sector is cheap and will benefit from economic recovery, according to Jon Thornton, the newly installed head of UK equities at Gartmore. Yet, while companies in this sector will deliver persistent growth, it will be far from exciting, he adds.
Thornton says one of the major issues facing the broader sector is recovery in the US, as firms such as Hanson, Wolseley and Aggregate are heavily dependent on US business.
He says: 'It depends what you believe about the US economy as to how these will perform. We are confident it has shown signs of bottoming, so there is good reason to be confident these stocks will enjoy increased demand for business.' Hanson, Wolseley and Aggregate are Thornton's preferred picks in this sector all of which have long-term contracts with the US government, known as TA21. The contracts will continue to provide a steady stream of revenue for these companies.
He says: 'We are a bit more cautious on companies with high exposure to Europe; RMC (Readymix Cement) is highly exposed to Germany so we do not have a favourable view of this stock, for example.'
He says in terms of the domestic house builders sub sector, there are many small but fundamentally strong opportunities. The big question affecting this sector is whether house prices will fall, which would have a negative impact.
Thornton is confident that with low interest rates, the sector will remain buoyant and strong demand will continue. Meanwhile, company valuations are low.
'Historically, markets have tended to value these companies as boom/bust, according to what point of the housing cycle we are in,' he says. 'In future, interest rates will not be as volatile as they were in the 1980s, so these companies should continue to grow steadily.'
Among companies Thornton favours in this sector are Berkeley Group, Bellway and Wimpey.
Stuart Fowler, head of UK equities at Axa Investment Managers, is also positive on the prospects of the sector.
He says: 'No matter which way you look at it, construction and building materials are cheap. The price earnings ratio is equivalent to about half that of the All-Share. The sector probably looks more attractive now than it has at any point for many years.'
Fowler adds that construction and building materials, as a sector, represents only 1.9% of the FTSE All-Share so it is often overlooked, plus there is a not a great deal of liquidity in these companies, hence the low valuations.
In addition to benefiting from strong demand amid an economic recovery, strong consolidation in the sector, for example Taylor Woodrow's purchase of Bryant, will also boost profitability for those companies.
Taylor Woodrow, which Fowler expects to continue performing well following its acquisition of Bryant, is among Axa's preferred stocks.
Another is Wolseley, which he describes as a cash generative business with growth prospects in the US that could lead it to quadruple. Fowler says it has a long established record of being able to make acquisitions as well as grow organically. 'It won't be a table-thumping stock, but will deliver steady, persistent growth,' he says.
TA 21 contracts ensure steady revenue stream.
Companies lowly valued.
House builders cheap relative to NAV.
No drastic growth opportunities.
Companies exposed to Europe will lag others.
House price falls will be negative.
Slower revenue and profits
Two questions to consider
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