Johannesburg - A better-than-expected trading update from Basil Read on Monday may prompt investors to include the stock in their portfolios.
Some analysts recommend the share. However, others warn construction companies are high-risk, low-margin stocks in general.
In the trading update, Basil Read said its headline earnings per share for the six months to end-June would be up between 25% and 35%.
An expert said the consensus for Basil Read earnings per share is 334c, which will put the company at a forward price earnings multiple (PE) of 4.1.
The PE indicates how much investors are willing to pay for a share based on price and earnings per share. If the PE is at 4, it means investors are willing to pay four times the share price for that specific stock, because of expectations which may include growth or earnings-enhancing acquisitions made during the year - which could boost returns for shareholders.
This is below Basil Read's historical PE of 5.19, as well as the 7.8 PE of the construction and materials index.
"If one compares it on a PE basis, it's at a discount to all other construction counters and to the market, which is why I would buy it," said Stanlib asset manager Lance Krowitz.
In addition, he said the firm's prospects are good after the acquisition of Mvela Phanda Construction (MPC), which is involved in the construction of prisons and hospitals - one of government's key infrastructure spend areas.
"In the construction space, whoever is focused on government's R787bn infrastructure plans is going to come out on top," said Vestact analyst Paul Theron.
Before the MPC acquisition, Basil Read focused on civil engineering, road construction, building, mixed integrated housing developments, property development, stone crushing, bitumen distribution, open cast mining and blasting.
Watch out for speed bumps
At the announcement of its full-year results to end-December 2008, it reported an order book of more than R6bn. With the MPC acquisition, this increased by a further R1.5bn.
"Its roads business is doing well, given the group's involvement in projects like the Gauteng Freeway Improvement Project (GFIP), and its open cast mining operations are picking up again after going through a bit of a downturn," said Krowitz.
However, Theron warned construction companies were classed as assets with high-risk operators and low margins.
"When the going is good, they do very well, but if there are any speed bumps ahead, they get crushed. They are too volatile, which is especially accentuated with the smaller counters."
But an Imara SP Reid research report from June 2009 said even though Basil Read is only the seventh largest stock in the construction sector, it has come a long way since having a share net asset value of less than 10c about four years ago.
It said diluted headline earnings per share growth of 69% to 263.7c for the year to end-December 2008 was slightly ahead of revenue growth of 66.3% to R3.5bn.
"The order book at year end was R6.3bn and places the company in line to beat its goal of becoming a R5bn-plus turnover group by 2010. This has been revised to become a R10bn turnover global construction group by 2013," read the Imara report.
Basil Read makes up 2.15% of the construction and materials index. Since the beginning of the year, its share price has lost 8.8% in value to trade at about 1 385c/share. This is against the trend for the construction and materials index, which has risen 1.08% over the same period.
- Fin24.com