Flood clean-up promises silver lining for UK construction firms

LONDON (Reuters) - Britain’s wettest December in a century could herald brighter prospects for UK engineering and infrastructure stocks this year as companies bid for contracts to repair storm damage and boost the nation’s flood defences.

Members of emergency services rescue a woman from a flooded house in York after the river Ouse burst its banks, in northern England, in this December 28, 2015 file photo. REUTERS/Andrew Yates/Files

Floods across northern England and Scotland have damaged thousands of homes and businesses, with analysts at U.S. bank Citigroup and brokerage Canaccord estimating total economic losses at more than 3 billion pounds ($4.4 billion).

While insurance stocks such as RSA and Aviva have suffered, down 7.3 percent and 6.8 percent respectively since Nov. 30, fund managers and analysts see potential upside for the likes of engineering firm Kier Group, which carries out road repairs, and Renew Holdings, whose subsidiary Amco provides services to track maintenance company Network Rail.

Pipe manufacturer Polypipe and paving company Marshalls are also likely to be in the running for contracts from local authorities, according to investors with holdings in the sector.

Even retailers such as DFS Furniture and Dunelm are tipped to benefit from the refurbishment work.

The impact on the stocks has so far been mixed: since Nov. 30, both Polypipe and Kier are down around 4 percent, although outperforming the broader FTSE All-Share index, which has lost 6.4 percent in the same period. Marshalls is up 0.6 percent and Renew has rallied 6.6 percent.

The full economic implications of the floods will take longer to unfold. Visiting the inundated city of York on Dec. 28, Prime Minister David Cameron said the government was already committed to spending 2.3 billion pounds on flood defences over the next six years, and would consider doing more.

Days later, he promised a package of more than 40 million pounds.

“If there is a policy move to spend a lot more on flood defences, that could be good for some of the infrastructure players,” said Eric Moore, manager of the Miton Income Fund, who holds shares in Kier.

The UK housebuilding sector, which includes stocks such as blue-chip Taylor Wimpey, was one of the best-performing areas of the market in 2015, with the Thomson Reuters UK Homebuilding Index gaining around 40 percent. Post-flood rebuilding could give them a second wind in 2016, as repair work is expected to boost construction activity in the first quarter.

“On balance, the (economic) downsides in Q4 will be broadly neutralised by the upsides in Q1,” said Kallum Pickering, senior UK economist at Berenberg.

The UK Construction Purchasing Managers’ Index showed growth in the construction industry gained momentum in December, rising from November’s seven-month low. Civil engineering, however, contracted for the first time since April.

“I would expect construction stocks to continue to do well with the prospect of further work to come from the rebuilding of those areas affected by the flooding,” said Derek Mitchell, UK Mid-Cap Growth Fund manager at Royal London, whose portfolio includes Kier and engineering contractor Keller Group.

Apart from the planned flood-related spending, investors are encouraged by other government building schemes, such as the 100,000 discounted homes promised during Cameron’s election campaign last year.

“It’s more likely that some smaller, unlisted and unheard-of builders will be brought in to actually do the work ... support services for construction we see as having quite a broad-based benefit to it,” said Jonathan Roy, advisory investment manager at Charles Hanover Investments.

About 80 billion pounds’ worth of major infrastructure projects are planned up to 2020, analysts said, some of which are still up for grabs.

Besides the flood repair work, they pointed to schemes like the Thames Tideway Tunnel plan, London’s new “super-sewer”, and projects for new nuclear reactors and high-speed rail links.

Royal London’s Mitchell sees potential gains for many construction stocks: “I think they can see the sunny uplands and (there is) enough work for them now to do well.”

(This version of the story was refiled to make clear Royal London’s Mitchell was speaking as manager of UK Mid-Cap Growth Fund, paragraph 13)

Reporting by Kit Rees; Editing by Sudip Kar-Gupta and Mark Trevelyan