4th Sep 2023 12:08
(Alliance News) - The construction sectors in the UK, US and Europe are a "mixed bag", according to analysis from Berenberg on Monday.
But while construction markets "remain challenging", Berenberg analysts think "we are close to the trough in most markets", providing a backdrop for "attractive" investment opportunities.
"This has been a challenging year for construction markets in the US, Europe and the UK, with volumes down significantly in all three. Rampant inflation feeding through to higher financing and mortgage costs has been the common driver of weakness in all markets with new residential activity, not surprisingly, experiencing the largest declines," said Berenberg analysts Harry Goad and Robert Chantry.
"Infrastructure spend has proven to be the most resilient while non-residential demand is negative, but more resilient than residential. While we think 2023 will be the trough in construction demand, we do not expect any material recovery in 2024 with 0% growth in Europe and the UK, and 2% growth in the US."
In the US, Berenberg said it expects a 6% decline in construction activity in 2023, followed by a "modest" recovery of a 2% decline in 2024.
"Housing has been the key weakness in 2023, but we now see some positive signals of a recovery emerging. In non-residential market, we think there is a mixed but overall negative trend as corporate spending on new projects has reduced," said Goad and Chantry.
But both said the US infrastructure market "remains the standout positive due to the benefits of the federal funding programme that will underpin mid-single-digit growth for the next few years".
In Europe, Berenberg also expects a 6% decline in construction activity in 2023, noting the last declines in residential of down 9%, followed by non-residential down 3% and civil works spending flat.
"We think 2023 is the trough of the cycle but forecast zero growth in Europe in 2024," said Goad and Chantry, expecting the market to return to "its trend growth" of 2% from 2025.
In the UK, Berenberg expects a more severed 10% decline in construction activity in 2023, forecasting the year to "end up being one of the most challenging years in recent history".
It noted housing as the "key weakness", down by around 20% and with the new-build segment down 30% and repair, maintenance and improvement down 8%.
"We forecast a smaller decline in non-residential and expect civil works to be broadly flat," said Goad and Chantry.
"The easier base effect helps the outlook for 2024, although we expect the construction market overall to be flat, albeit with growth in housing of 1% (with new build 0% and RMI up 2%) offset by a further late-cycle decline in non-residential. "
Berenberg also offered its top 'Buy' picks within the construction sector in Europe and the UK.
In Europe, it backed Dublin-based CRH PLC, citing growth and buybacks; Kingscourt, Ireland-based Kingspan Group PLC on its "best-in-class" environmental, social and governance growth; Heidelberg, Germany-based Heidelberg Materials AG on its return on capital employed recovery; Vienna-based Wienerberger AG and its "outstanding valuation"; and Paris-based Vinci SA on its profit resilience.
On Monday after midday, CRH was down 0.5% in London, Kingspan was up 1.6% in Frankfurt, Heidelberg was down 0.3% in Frankfurt, Wienerberger was up 0.2% in Vienna, while Vinci was up 0.9% in Paris.
For UK stocks, Berenberg backed Cobham, Surrey-based Berkeley Group Holdings PLC as a "differentiated" housebuilder, Dublin-based Grafton Group PLC on its capital allocation optionality; Leeds, England-based Genuit Group PLC on its "self-help and sustainability trends"; London-based Howden Joinery Group PLC as a "long-term compounder"; West Sussex, England-based Volution Group PLC on its ventilation end-market growth and consolidation; and Solihull, West Midlands-based Hill & Smith PLC on its US infrastructure.
On Monday around midday in London, Berkeley was up 0.3%, Grafton was up 1.4%, Genuit was up 1.1%, Howden was up 1.0%, Volution was down 0.1% and Hill & Smith was down 0.3%.
Berenberg said it identified five key themes for stock picking: through cycle winners; smart capital allocators; standout valuation; ESG winners; and ROCE-focused restructuring.
By Greg Rosenvinge, Alliance News reporter
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CRHBerkeley GroupGrafton GroupGenuit GroupHowden JoineryVolution Group PLSHill & Smith