Bottom Line up front, following these results I sold my holding in GFRD. That is not to say that these are not very decent results “given where the company is coming from”. But after reading the results my feeling is I would not choose to start from here and I sold.
I also admit that I have other significant holdings in Construction and Property and was concerned by the macro in this sector. Including reports that many of the foreign workers have not been returning from their summer holidays post Brexit.
As I see it my investment in GFRD was built on the premise that this was a recovery play and the results for the year ending 30/06/18 suggested a lot of recovery had been going on.
Revenue +11%, PBT +145%, +ve net cash.
There was a lot too like in the results. But I do have some concerns. I do wonder how solid the company’s improvements are because following the results the company put out a number of announcements about work it would not be bidding on. The Stonehenge bypass being one example. Whilst I expect new management to stop doing the same stupid things that old management did, I get concerned when they need to tell me; is it for my benefit or for the staff that are still there? Is there still a cultural change that needs to be delivered or may be too entrenched?
I also see GFRD as 3 businesses. Their combination makes most sense if you believe management think the original business is not great and are trying other businesses as a way to get into something better. This evolution of a business makes very good sense for a business, but as shareholder why don’t I just buy into already existing good businesses and remove the risk that the evolution does not work or that the bad bit continues to bring down the good.
The largest part of the business is Construction. Revenue £1,687m. It is the historical heart of GFRD and the cause of many of its problems. I don’t believe it is a great business and I do not think management does either. It is targeted with a >2% pre-exceptional operating profit margin. Which too my mind means it will not make a lot when things go well and every now and again when something goes wrong you will lose the last 5 years of profits. Which by then have gone in management bonuses and dividends.
Then the company has Linden Holes. Revenue £947m. Target Operating Profit Margin 20%. I like this business. But I like both Persimmon as already a class business and Bovis as evolving into a class business just as much. If Linden was independent I might hold but it isn’t and remember the recent rights issue, whilst caused by Construction also went to prop up Linden.
The third leg is Partnerships and Regeneration. Revenue £475m. Operating Profit Margin target 7%. To my mind 7% is OK. It is a lot better than 2%. But its not exciting and the only good rationale I see for doing it is that it moves resources from Construction utilising the same skill set. However whilst moving from a 2% target to a 7% target is sensible for a business as a shareholder why would I want to be here?
I am also underwhelmed that you do a rights issue in April and declare a dividend in September. If you did not need the money the Company should not have taken it. If the money was needed why could the company not get a loan? And if the money was needed then can it really not be needed now? Does it demonstrate that there was solely a very short term issue that has been largely resolved or does it demonstrate a management that is a bit free and easy with shareholders. I do recognise that the dividend is only partly the value of the rights issue, circa 33%. But 5 months later it’s all good?
So a nice bounce on results. Doubts IMHO over both management and strategy and I sold. But as always DYOR.