Interactive Investor

Stockwatch: this construction boss is filling his boots with shares

20th July 2021 12:32

Edmond Jackson from interactive investor

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Our stocks expert considers the merits of a small-cap builder with a CEO putting his money where his mouth is.

Henry Boot (LSE:BOOT), a circa £350 million Sheffield-based small cap that is diversified across property and construction, is the latest UK company to declare trading “ahead of expectations”.

Care is needed with all such updates because managers may have set them cautiously amid the ongoing uncertainty, but I am interested to keep a tab on Boot because its infrastructure-related activities dial into government policy.

Also, because if inflation gets ingrained then physical assets such as property will become a preferred investment. 

Defensive growth for challenged times 

This 135-year-old group likes to promote itself for: a high-quality strategic land portfolio, an enviable reputation in property development backed by a substantial investment property portfolio and an expanding, jointly owned house-building business.

It has construction specialism in the public and private sector, a plant hire business, and generates strong cash flows from its A69 PFI contract. 

Although mindful its stock has appeared fully valued for some time - quite likely why Boot’s chart appears in a consolidation phase – it intrigues me how such a business mix should be well placed. 

This appears affirmed by management citing strong trading across the group, with 2021 profit due ahead of published expectations – i.e. for £22.4 million net profit on £264 million revenue.

The table shows this would be median the 2019 and 2020 outcomes, so could be seen as partly bringing forward 2022 expectations for £32 million net profit on £313 million revenue. 

The essential snapshot valuation looks high enough 

The stock initially rose 6% to 277p in response, easing to 272p Monday afternoon in a difficult day for markets.

The implication of 12 months’ forward earning per share (EPS) around 20p is a price/earnings (PE) multiple near 14x. Should a circa 6p dividend be declared as expected, up from 5.5p last year, the yield is quite immaterial at just over 2%. Market price is also a 19% premium to end-2020 net asset value albeit with scant intangibles. 

No progress then since I drew attention as a “buy” last March – along a rationale of capitalising on the Tories’ levelling-up agenda for the North.

The stock has also been quite volatile/sideways in recent years, although if you bought earlier on there has been a circa 4% yield. 

On essential fundamental/technical data then, Boot would not qualify for any “buy” screens, although momentum has appeared to build in terms of underlying projects. 

Demand from logistics industry, construction and housebuilding 

The update affirms what was said at the March 2020 prelims, declaring “strong forward sales and a high order book” for the new financial year. 

Similar as £3.5 billion company Tritax Big Box REIT (LSE:BBOX), Boot is citing “particular growth in both occupier and investment demand within the industrial and logistics market”.

This is a function both of the digital economy and institutional investors tagging on to big box warehousing as a durable concept for capital protection and yield.  

Possibly industrial demand could be relatively fleeting, according to progress with recovery from the pandemic.

It appears to hinge on whether there is no major going back on the current easing of UK restrictions. 

The investment portfolio valuation has exceeded forecasts for the first half-year and further growth in valuations is expected by end-2021 due to planned retention of several assets currently being built. 

Construction is ahead of expectations, with a full order book for 2021; the Banner plant hire operation is said back to 2019 trading levels, and house-building also land-trading are benefiting from a buoyant housing market. 

Such a narrative implies the stock should indeed be now trade on what looks a full valuation, in anticipation of forecasts being raised in due course.

The spoiler would be a summertime chaos of self-isolations, amid rampant Covid, leading to some degree of renewed lockdowns over the autumn/winter.  

The 2020 results were sullied by Covid disruption  

Revenue had slumped 41% to £222 million and pre-tax by 65% to £17.1 million, and could have been worse were it not for land disposals.

The spring 2020 lockdown was particularly disruptive though, and government must be anxious not to stymie industry again.  

The cash flow statement still showed gross cash from operations less than 2% easier at £21.1 million, and 18% ahead on a net basis due to lower tax and debt interest.

Even after selective investments were made in Boot’s long-term key markets – industrials and logistics, residential and urban development – disposals helped check the investments’ cash outflow to £6.8 million.  

Net cash was maintained at £27 million and rose to £38.5 million in March due to land completions; however, the latest update cites a return to net debt of £13 million due to investments ongoing.

In early July, for example, came the £6.2 million acquisition of a three-acre industrial site in Welwyn Garden City – aiming to develop some 70,000 square feet of industrial/warehouse space, well-placed next to Aldi, Ocado and others.  

Cash generation also supported a 10% rise in the total dividend to 5.5p although the table shows historic generous earnings cover as headroom.

Before the update, the payout was projected to rise over 7p in respect of 2022 implying a 2.6% yield. 

Henry Boot - financial summary
Year end 31 Dec

  2014 2015 2016 2017 2018 2019 2020
Turnover (£ million) 147 176 307 408 397 380 222
Operating margin (%) 19.0 18.0 12.9 13.8 12.4 12.9 3.7
Operating profit (£m) 28.0 31.7 39.5 56.2 49.2 48.9 8.3
Net profit (£m) 21.2 23.0 28.3 42.4 37.5 37.6 11.9
Reported EPS (p) 15.9 17.3 21.3 31.8 28.0 28.1 8.9
Normalised EPS (p) 15.7 17.0 21.1 32.0 28.2 27.6 10.3
Earnings per share growth (%) 87.0 8.0 25.0 51.0 -12.0 -2.0 -62.8
Price/earnings multiple (x)           26.5 25.4
Return on capital (%)   12.2 14.4 18.6 14.9 13.9 2.3
Operating cashflow/share (p) 6.6 0.2 15.1 27.2 8.1 8.8 0.9
Capex/share (p) 1.4 1.6 1.8 3.4 1.4 1.5 9.5
Free cashflow/share (p) 5.2 -1.4 13.3 23.8 6.7 7.3 5.5
Dividend per share (p) 5.6 6.1 7.0 8.0 9.0 5.0 2.1
Yield (%)           2.0 1.6
Covered by earnings (x) 2.9 2.8 3.0 4.0 3.1 5.6 42.1
Cash (£m) 4.4 12.0 7.4 10.3 10.9 42.3 -27.0
Net debt (£m) 36.4 38.9 32.9 29.0 18.4 -27.0 232
Net assets/share (p) 150 166 175 201 224 237 232

Source: historic company REFS and company accounts

The CEO and his family continue to accumulate equity

This is a bullish feature to regard Boot as at very least a “hold” despite the macro uncertainties. 

Last March, I noted how the CEO from January 2020 had bought £100,000 worth of shares at 238p. He then added £60,000 worth at 269p on 1 April and on 5 May his wife bought nearly £80,000 worth at 272p. Moreover, their son also bought nearly £20,000 worth, likewise at 272p. 

This followed his strategic review which determined the group was in a good shape, with objectives to focus on three key markets while exploiting synergies, collaboration and efficiencies. That implies “bottom-up” potential to unlock besides the “top-down” overall favourable tailwinds. 

On 10 June, a non-executive director did sell over £525,000 worth at 276p, albeit less than 1% of his total shareholding. On 23 June, a total 432,223 nil cost options were granted to eight senior executive personnel, 49% of which went to the CEO.

While options do not exactly put managers and outside investors in the same boat for risking capital, the CEO has done so with sizeable equity buys. 

Vesting of options will also depend on achieving performance criteria for total shareholder return, underlying return on capital and EPS growth – over a three-year period to end-2023. Vesting would not be until April 2024, with a two-year holding period.

This looks a decent hurdle prioritising long-term sustainable value.  

Dicey near-term call which rests on the UK economy 

Despite no sign of this stock breaking out of its four-year sideways’ consolidation, its latest update affirms underlying operations improving and well-placed.

Price has at least not fallen like various housebuilders’ since last spring, albeit is quite typical of them post annual results. 

Since the group is delivering better than expected and the CEO has been filling his boots (excuse the pun), it affirms my “buy” stance.

You know the form though: if Boris Johnson’s gambit results in a Covid policy reversal, domestic UK stocks are liable to suffer – although in Boot’s case this could present an even better opportunity. Hence, overall: Buy. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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