Market Report – CMA signals fundamental concerns about housebuilders
Sophie Lund-Yates, lead equity analyst, Hargreaves Lansdown: “Housebuilder stocks have fallen as the CMA launches a probe into the sector. Concerns include poor customer outcomes from the quality of new homes, with faults on the rise over the last ten years. A major trigger for the investigation is accusations that some major housebuilders are sharing confidential and commercially sensitive information relating to sales prices and sales rates. Other criticism is levelled at the UK’s overly clunky planning processes, which are contributing to the under-supply of new homes. Seeing rules streamlined could help some of the big listed names shift more houses, but it could also increase competition. The accusations of poor build quality and anti-competitive practice will be of more immediate importance, as findings against either strike could lead to margin degradation in the short term, but this is far from guaranteed.
The FTSE 100 has lost ground in early trading, following muted US futures activity. This of course follows record trading last week, so the slow down signals a pause for breath rather than anything more sinister. Investors are looking ahead to the monthly personal consumption expenditures price index reading, which is the Federal Reserve’s preferred measure of inflation, on Thursday. There’s relatively little news to fill the vacuum between now and then, although AMC’s earnings will help shed light on whether consumers have been convinced to return to movie theatres following a strong run of blockbusters. AMC’s fortunes are precarious, so any missteps will be sorely punished.
Next is eyeing a bid to buy parts of The Body Shop, after reports it had been keeping an eye on the beauty chain for some time. This wouldn’t be the first time Next has snapped up retail assets as it moves to continue the overhaul of its online presence into a multi-brand platform. Next’s retail park presence and first-in-class logistics footprint means it’s holding up well despite broader challenges in the sector. The judgement of any Body Shop deal would of course boil down to price.
The oil price has faltered, with Brent crude resting at under $82 a barrel. There are real concerns that higher-for-longer interest rates is going to become a reality, which could dent demand for the black stuff. The demand outlook in major importer China also remains highly uncertain, which comes despite efforts from authorities to boost consumption.”
Matt Britzman, equity analyst, Hargreaves Lansdown: “Bunzl’s the steady eddy you may never have given a second look. Far from a glamourous headline setter, Bunzl gets on with its business of selling essential goods and finding margin accretive acquisitions – and it’s very good at it. There was some revenue weakness over the past year, a mix of volumes coming down in some geographies and normalising prices. A lot of Bunzl’s pricing is correlated with inflation, so as costs for the underlying raw materials come down so does Bunzl’s top line. The key thing to remember is revenue’s still around 28% higher than 2019 levels. Looking forward, volumes should come back but the pricing weakness is a potential headwind for the new year.
Strong cash generation and improving margins were highlights of last year. Acquisitions continue to do a lot of the work. There’s added risk with this approach, but in a heavily fragmented industry the deal pipeline is plump and Bunzl’s an expert at finding businesses with good margins at decent prices.
As a defensive growth business, there’s a lot to like. If Bunzl can contain the ongoing pricing weakness, then the pipeline of accretive acquisitions can do its job to prop up margins over the coming year.”