Building materials companies will see severe earnings declines this year and the sector’s shares are likely to be volatile for some times, UBS analysts said on Friday, but upgraded brick-maker Ibstock Plc (LON:IBST) and building material supplier Travis Perkins PLC (LON:TPK) to ‘neutral’ on valuation grounds.
Ibstock was reversed back to ‘buy’ from ‘neutral’, a month after being downgraded, with its share price target cut to 210p from 270p, while Travis Perkins was moved to ‘neutral’ from ‘sell’ as its target was cut to 1,040p from 1,400p.
UBS also downgraded insulation specialist Kingspan Group PLC (LON:KGP) to ‘sell’ with the share price target cut to 40p from 56p versus a last close price of 44p, with the Ireland-based company's higher risk with 80% new build exposure.
The analysts cut earnings per share across the companies in its coverage by 60% for 2020 and 34% for 2021.
They fell the key issue will be “the shape of a normalisation in 2021”, forecasting underlying profits to bounce back by 23% and EPS by 75%, leaving 2021 profits still down 10% and EPS 20% below levels in 2019.
With news such as the go-ahead for the UK’s HS2 rail project and the potential help by fiscal stimulus, the analysts think infrastructure and repair, maintenance and improvement spending “will normalise quicker than private new build construction” in 2021.
“In the short-term, these won't provide much protection because shut downs affect all activity levels similarly.
“We don’t think geographic diversification will help much either in the short-term (although severity of shut-downs varies across countries).”
The analysts don’t see liquidity issues for the sector, with balance sheets generally in good repair, bond markets open and government support, though Travis Perkins is seen having the highest leverage by year end.
“Dividend cuts have commenced already and we expect some more to come. We cannot categorically rule out equity issuance but think they are unlikely.”