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Building on construction stocks

Johannesburg - The hope that spending on SA's public infrastructure will counter the effects of a global slowdown is keeping many analysts positive about the prospects of JSE-listed construction firms.

Spending on infrastructure, as announced in this year's budget, will now rise to 9.6% of SA's GDP, with R60bn alone going to Eskom over three years.

"It appears that water and sanitation schemes are also moving onto the radar screen, receiving R1bn," Vega Asset Management director François du Plessis said.

Along with massive public infrastructure spending, costs have also come off - steel prices are lower, cement prices have stabilised and the slumping oil price is keeping fuel bills down.

Another upside for construction firms is that the depressed private building sector - specifically residential - which has dampened earnings of many building materials suppliers and construction firms, should start to pick up as interest rates fall.

Economists have recently forecast as much as a 450 basis-point cut in rates this year. "But I guess that won't start to happen until towards the end of the year," said Vestact market expert Sasha Naryshkine.

But the slump in the private sector over the last four years has meant that spending by the state has become more important to construction companies, which is why the environment for new tenders has become increasingly more competitive, which has an impact on margins.

"Given the above, the risk associated with forecasting earnings for construction companies has increased. The test will be if the companies can replenish their order books going into 2010 and 2011," said Canterbury, adding that the emphasis will now be on the way in which construction companies are managed in this changing environment.

Cut off at the knees

Generally the construction shares have come off tremendously and look much better value at these levels, while I do not think the outlook has deteriorated anything like the shares have come off, said Dirk Kotzé of Coronation Fund Managers.

"All the guys with big exposure to the gulf have already had their share prices cut off at the knees - Murray & Roberts, Stefanutti Stocks, Group Five. Their share prices have taken pain already. I suspect that all the bad news is already baked in the cake," said Naryshkine.

Last year the sector fell 43% after a great 2006 and 2007, and it's down 17% so far this year. "In some cases we have rewound to 2006 prices," he said.

Naryshkine said the prices have all come into line with the rest of the markets and no longer trade on crazy multiples in the high teens and low 20's.

"As such all the stocks look attractive, but I think the quality of the earnings going ahead will be called into question."

Wilson Bayly Holmes-Ovcon (WBHO) is doing well relative to its peers, he feels. "In fact, the results released on Tuesday looked nothing short of very decent."

Naryshkine believes cement producer PPC looks very attractive, thanks to its dividend, while WBHO looks quite cheap relative to other stocks in the sector.

Kotzé thinks Group Five offers the best value proposition of the shares at the moment. "Unfortunately, it is not as liquid as the bigger two (Murray & Roberts and WBHO)."

For Stephen Meintjes, head of research at Imara SP Reid, Group Five currently looks the best, with more than enough work to keep it busy for the next few years at least.

"WBHO is confident about the second half of financial 2009 and says the order book of R16.7bn provides 'a solid foundation' for financial 2010. Murray & Roberts and others are confident at least until June.

"On this basis Group Five currently looks the best all-around on a 12 months forward price earnings (PE) of around 5.6 times, although it is how to ignore a Basil Read on a historic price-earnings multiple of four times earnings."

Baked into the price

According to Du Plessis, Raubex is another company to look out for, as it is well positioned to benefit from the roads expansions.

"According to the Automobile Association, up to 33% of SA's roads need urgent attention. It is estimated that the road maintenance backlog is R100bn. Roads are the backbone of any economy, especially South Africa's."

"Raubex is a significant player by market share in SA with respect to roads construction, re-surfing and the supply of asphalt. According to our calculations, Raubex is trading on a forward PE of 5 times to February 2010. I like the earnings visibility of the group," he said.

Most of the experts, however, feel that Aveng could struggle. Aveng was recently slapped with a R46.3m fine by the Competition Commission, following an investigation into anti-competitive behaviour at one of its business units.

"Aveng could have some troubles meeting last years earnings, but again, this is baked into the price," said Naryshkine

"With regard to the shares, it appears that Aveng has de-rated quite severely, in spite of having a significant amount of cash on its balance sheet. Providing the cash is well used, there should be upside to the existing price. There is no obvious candidate for the 'worst share' performance," said Canterbury.

- Fin24.com

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