This report is an updated version of the report published on 01 June 2022 at 08:25 AM GMT+1

1. UK Construction & Engineering Sector Landscape

The construction & engineering sector in the United Kingdom is quite broad and covers projects in diverse sectors like commercial & residential construction, industrial construction, infrastructure including transportation construction, and energy and utility construction. The country has flourished in the construction space having high-end expertise in architecture, design, and engineering. The companies in the region are also paving the way for sustainable construction solutions. Some of the reputed companies in this space include Balfour Beatty PLC, Kier Group PLC, and Morgan Sindall Group PLC.

As per data from the Office for National Statistics, increased traction in construction activities was witnessed during March 2022 with monthly construction output increasing by 1.7% in volume terms. This marks the fifth consecutive monthly growth and a record high in terms of the monthly level at £14,994 million. The growth has been driven by an increase in both repair and maintenance (3% growth) and new work (1% growth).   

Key Trends in the Construction & Engineering Sector

Risk Exposures to Construction & Engineering Sector 

• Supply Chain Risk: The pandemic exposed the vulnerabilities of the global supply chains, and the challenges persist affecting key construction materials.  
• Labor Challenges: Firms in the construction & engineering space continue to grapple with labor shortages as the industry is trying to overcome the challenge of attracting workers.
• Macro Headwinds: Inflation stood at high levels of 9% in April 2022, thereby giving rise to input cost pressures and impacting margin performance.

SWOT Analysis

Construction & Engineering Sector Outlook

The construction & engineering sector has been on a recovery path after the initial impact of the COVID-19 pandemic. The sector is expected to be aided by favorable tailwinds including a decent pipeline of infrastructure construction projects in the long term. Major banks in the United Kingdom expect to shift their lending mix towards the renewable energy sector, firms developing technology for electric-vehicle batteries, green mortgages, and the construction sector. This augurs well for the construction and engineering space, which has an important role of lifting the economy in a sustainable way in the post-pandemic phase. 

2. Investment analysis and stocks under discussion (FAN and SPR)

After gaining insights into the Construction & Engineering sector, we would look at the business model of two players listed on the London Stock Exchange.

A. Volution Group PLC (LON: FAN)

(Recommendation: Speculative Buy, Potential Upside: 14.47%, Market Capitalization: GBP 809.93 million)

Volution Group PLC (LON: FAN) is an FTSE 250 index listed designer and manufacturer of energy-efficient indoor air quality solutions.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock is trading above the 20-day MA trend line and reflects bullishness in prices.  

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 14.47% over the closing price of GBX 407.50 (as of 31 May 2022).

B. Springfield Properties PLC (LON: SPR)

(Recommendation: Speculative Buy, Potential Upside: 15.76%, Market Capitalization: GBP 151.60 million)

Springfield Properties PLC (LON: SPR) is a FTSE AIM All-Share listed leading housebuilder in Scotland that offers private and affordable housing.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock is hovering near to its lower Bollinger band with low 14-day RSI level of ~10.60, reflecting underbought stance.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 15.76% over the closing price of GBX 127.50 (as of 31 May 2022).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.  

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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