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Sector Report – Household Goods and Home Construction

Sector Report – Household Goods and Home Construction

FTSE 350 weighting:  c. 1.7%    Beta: 0.81

12 Month Closing Price Range: 5671/7072    Last Close: 6564


Technical Analysis

The sector chart is very much dominated by Reckitt Benckiser (c. 80% weighting).  The chart looks very neutral from a long term technical basis, broadly speaking trading between 5700/7000 for the past 18 months.  A correction since the beginning of 2011 is again threatening to result in a correction back towards the flat 200 day moving average.  Momentum indicators are in a neutral long term configuration, with the RSI moving between overbought and oversold as the range has continued.  With the lack of progress in the last 18 months the relative position is quite weak, falling to a 2 year low in the last quarter.  The deteriorating near term technical position should find buyers returning in the congestion support band around the 200 day ma, before the medium term upside bias (the 50 & 90 day moving averages are positive) resumes for a move back towards 7000.  A move below the key December low at 6098 would open the range lows.

Sector Constituents Comparison


Key Supports      404.1p     Key Resistances        451p
                          380p                                    470.7p
                         335.9p                                   520p

Technically, the improvement seen in Persimmon is indicative of a broader improvement in most of the housebuilders, with base patterns across the sub-sector. The shares of the largest listed housebuilder completed a base pattern above 415p to imply a target of 494p.  A correction has bullishly found support above the 200 day moving average which suggests an improving outlook.  Moving averages are in positive configuration, momentum indicators are also encouraging, while the relative performance has broken an 18 month downtrend.  A test of the key resistance at 520p could be seen in due course.  A move back below the 200 day ma would now be disappointing, though the base pattern would remain intact until a push back below support at 380p.

Fundamentally, the recent year end trading update was positive.  Debt has been cut significantly, by £51m to around £216m, which was more than expected.  Also with continued and ongoing focus on cash generation, EBIT margins will also be maintained at c. 8%.  As a result the board expects profit before goodwill and exceptionals to be at the top end of market expectations.  This could easily allow room for upward revision of analyst estimates.  With house prices steady in H2 2010, the board expects the UK housing market to stay static during 2011 as the economic uncertainties continue.  If this is the case, with continued margin improvement and strong cash generation, Persimmon should perform well.  A prospective December 2011 yield of 1.9% is second only to Bellway amongst the housebuilders.  Market consensus is positive with 9 buy recommendations from 14 brokers, with only 3 sells.

Key Supports    162.3p    Key Resistances    183p
                      155.5p                               193.3p
                      128.2p                               198p

Technically, the chart of McBride (in the non durable goods subsector) looks weak again.  The shares have broken key support at 162p taking the shares to a 4 month low and suggests that the key support at 128.2p may now be tested.  Moving averages have all converged to turn down in bearish sequence, while momentum indicators are also negative.  The RSI is towards oversold which may limit immediate downside however any rally should be limited to the 200 day moving average c. 174p before downside resumes.  The relative strength confirms the break of key support suggesting further downside.  A move above the key resistance at 193.3p would be needed to suggest the bears have lost control.

Fundamentally, the gap down was due to a disappointing trading update at the beginning of January.  Constant currency revenue growth was just 2%, driven by Central & Eastern Europe.  However, the company cited the very competitive UK market and issues with cost recovery as the reason for the expectation that H1 trading profit would be at the bottom end of analyst expectations.  The increase in raw materials costs will continue to be an issue, with the company needing to react to the ongoing boom in commodity prices.  The shares do not look too expensive on c. 10x June 2012e, while yielding 4.3% (more than Reckitts).  Consensus is luke-warm with only 1 buy recommendation out of 6, with 5 neutrals.



This report was written by Richard Perry – Chief Market Strategist at Central Markets  The writer does not hold a position in the company featured, but client accounts may. The material in this report has come from the company’s corporate website and Alpha Terminal.

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