Venture: Small-Cap Construction

Issue 20;

No more houses.

Galliford Try (GFRD)

“Operating as Galliford Try and Morrison Construction, our work for public and private sector clients is well balanced and extensive. We are focused on the health, education, defence, custodial, highways and environment sectors, where we have core and proven expertise, and a strong pipeline, as well as our growing capabilities in FM and the Private Rented Sector. At 30 June 2023, we had 3,900 employees, with 6.3% of them in graduate, apprentice or trainee roles.”

This is another UK small-cap trading on a negligible enterprise value. The company is valued at £261m, with £209m of cash, and is debt free, but with £43m of liabilities such as lease obligations and others. The enterprise value is £95m.

Normally, in these situations, you write it off as an asset situation with no catalyst for change. But when you investigate, you realise GFRD is a thriving business, and they are buying back shares, which proves it. In the half-year report released on 6 March, confidently titled “Strong Momentum and Continuing Growth”, they stated:

• Secure outlook with £3.7bn (H1 2023: £3.5bn) high-quality and focused order book.
• Excellent visibility over future revenue with 98% and 83% of projected FY24 and FY25 revenue secured.
• The Sustainable Growth Strategy is on track to achieve our targets ahead of plan.

It goes on with a 21% increase in revenue to £819 for the six-month period, a 33% increase in profits, margin improvement, and a 33% increase in the dividend with a yield of 4.4% expected for this year. Looking at earnings per share, there’s a pattern of growth.

Galliford Try Earnings Growth

The corporate history is interesting. The Galliford business was based in the Midlands, while WS Try was in Uxbridge, near London. The two businesses merged into a national contractor in 2000. They later acquired Morrison Construction in 2006 in Scotland and Miller Construction in 2014.

Through the 2000s and 2010s, the group had built two strong housing brands in Linden Homes and Galliford Try Partnerships. In 2020, both these businesses were sold in a £1bn deal with Bovis Homes to become the Vistry Group (VTY).

This canny move to sell their housebuilding division was inspired. The result is that the total return of GFRD shareholders has been nearly twice that of the UK housebuilding sector. With the sector turning down in 2021, their exit was well-timed. Not many companies volunteer a material fall in their market capitalisation.

Galliford Try Market Cap

I next show enterprise value with revenue. EV/Sales is 0.1x. The drop in sales resulted from the sale of the housebuilding division, with another later drop relating to the pandemic. Construction activity is back above pre-pandemic levels.

EV/Sales Is Extremely Low

The company generates strong cashflow, which is expected to be over £30m for the next two years, giving a free cashflow yield of 25%. What to do with all of this money? Buy back shares. The total shares outstanding have fallen by 10% in a little over a year.

GFRD Shares Outstanding

The four analysts are buyers with a price target of 322p against a 253p share price. The more recent forecasts would average 365p. This is a simple situation, and the company is undervalued as they could practically afford to buy all their shares back. Best to buy them before they do.

Risk

This is a UK small-cap, yet the shares are surprisingly liquid for their size at £550k per day. The company is debt-free and has a high cash balance. As a result, the shares have a modest volatility of around 30%. I deem this to be medium to high risk, but the underlying business is less risky than that due to its strong balance sheet. There are always unknowns.

Venture Update

If you are reading this, that means you have signed up for the Pro package. Thank you. Our strong client support will ensure that Venture will not only continue but also become our flagship investment service. 

Keller Group (KLR) released “record results” this week. Profits jumped, debt declined, the dividend rose by 20%, and the shares rallied 15%.

The gold stocks rallied as expected on the gold high. Newly added Torex (TXG CN) looks promising.

Secure Trust Bank (STB), our most undervalued stock by forecast, hasn’t moved. But Virgin Money (VMUK), formerly Northern Rock, was bid for by Nationwide, and the shares rallied 35%.

BATS is very cheap, but I do wonder where the catalyst is coming from. I can only assume that a conglomerate or private equity will eventually inhale the 17% free cashflow yield and 10% dividend yield. The latter would make sense.

Note: Prices are recorded at the time of recommendation.

Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.

Many thanks,

Charlie Morris

Editor, Venture