The premium valuations of our construction exposed names are built on a fear of disappointment
from elsewhere in the sector. Yet the outlook for construction markets is uncertain too; we see
mixed signals coming from US non-residential and political risk in Europe is rising. Relative to the
Street’s expectations, growth could slow for construction exposed stocks next year, pressurising
their premium valuations. Legrand to Neutral (from O/P). Rexel the only O/P thanks to its self-help.
Mounting uncertainty on US non-residential
During the past six months we have seen mixed signals coming out of the US non-residential
market. Our analysis of the US non-residential market’s various sub-segments points to a
slowdown in the rate of its growth next year rather than an outright downturn. In the post crisis era,
North America has been a bright spot; a slowing of momentum could take many by surprise.
The European recovery is likely to be slower than hoped for, impacted by political risks
European construction activity has started to recover and overall demand remains well below its
normalized trend across a number of countries. However, political risks are likely to rise over the
coming 12 months, impacting the strength of the market’s recovery.
Relative earnings momentum no longer offers support
Over the past 12 months, our construction exposed stocks’ sector relative earnings momentum has
stalled, due to: 1) stabilisation of industrial activity; 2) resilient progression of margins elsewhere in
the sector; 3) a lack of positive surprise from construction volumes. Barring an industrial recession
we see little reason for construction stocks to regain their relative earnings momentum in 2017.
Construction stocks’ premium relative ratings are at risk barring a global recession
Building fittings stocks retain a record high premium rating (40%). We believe this highlights the
quality of those stocks, but also the bearishness of investors in respect of the demand outlook for
the rest of the sector. Barring a recessionary scenario, we struggle to see any relative multiple
expansion or earnings momentum for these companies. Legrand to Neutral from O/P; Kone and
Assa Abloy Neutral. O/P on Rexel reflecting the significant self-help potential in the medium term.