Polypipe PLC downgraded as coronavirus creates new drivers for building

UK construction shares have been volatile through the coronavirus crisis and while the sector as a whole is not cheap, Berenberg analysts see opportunities for investment.  

After the initial bounce from the reopening after the coronavirus lockdown, the recovery in each end-market will take different shapes, the analysts said. 

They are cautious about the pace of any recovery in housebuilding, are most positive about infrastructure followed by repair, maintenance and improvements (RMI), and are wary about non-residential activity.

Taking lessons from 2008-09, when public sector gross investment increased by 52%, as the economy slows again, the analysts said they would expect fiscal stimulus to be key to supporting the economy in the reaction to coronavirus, while RMI was also more resilient in the global financial crisis as homeowners stayed put.

“Although COVID-19 has meant spend has been focused elsewhere, recent commentary has been positive, with some schemes being accelerated while phase 1 of HS2 is also due to begin construction by 2021.”

With operations now beginning to re-open and balance sheets are generally in good shape, liquidity concerns have fallen, but cost management is now seen as a crucial factor as the sector gradually comes off the furlough scheme, restructures and manages social distancing on site. “This will weigh on margins.”

Top stock picks included companies where there is perceived to be more of a fiscal opportunity via infrastructure, such as PLC (), where the ‘buy’ rating was reiterated and share price target upped to 103p from 95p. 

Two stocks that have underperformed, but where the analysts believe end-markets will be relatively more resilient, were among the top picks: () and PLC (). 

Least preferred shares were those whose valuation remains elevated “despite cyclical risks and a lack of geographic diversity”, such as PLC () and PLC (), which were both kept at ‘hold’. 

Group PLC () was also downgraded to ‘hold’ for these reasons and the analysts said they remain wary about () given the fall in free cash flow as the group builds new capacity.