CONSTRUCTION

The construction sector has seen support from strong housing markets, public works and a supportive economic activity backdrop through most of 2019. Germany and the US stand out positively. The US is one of the strongest markets globally. It has shown consistently strong fundamental data in H2 19 and we expect continued support from monetary policy and additional infrastructure spending. The early months of 2020 have seen strong activity, particularly in Germany with residential as the prime driver, as evidenced by a PMI reading of 55 in February as well as the highest order book confidence indicator reading amongst the major euro zone countries. The first German confidence indicators and PMIs since the Covid-19 lockdowns show stronger than the rest of Europe: We attribute this to continued commitment to public procurement and ongoing activity at a large number of sites. The Eurozone as a whole shows a mixed picture: While the overall construction PMI read 52 before the crisis, a number of countries were well below that, such as France with 50. In Spain, activity declined by 1.7% in Q4, which follows a decline in Q3 and coincides with housing starts falling into negative territory.

The prime risk is business interruption due to quarantined workforces, sequential chain delays, material shortages and ultimately project delays. There is some mitigation stemming from the local nature of the sector. Completion delays, though, can lead to significant short-term liquidity issues, particularly for SMEs. We have already seen these issues in China. We expect a large number of companies to tap into government support and liquidity schemes. That being said, while risk of insolvency is clearly high for a certain time, construction will also be a major beneficiary from stimulus measures, infrastructure build and public support.

While on average, finances are solid with a sector net debt to Ebitda ration stable at 1.83x, there is great variation around that average. Current consensus implies a 380bps y/y Ebit margin decline 2020e and 12.6% decline in operating cash flow (source: Factset).  Momentum of earnings revisions is currently negative and may remain so until visibility improves.