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Johannesburg – The market's hostility towards JSE-listed construction group Sanyati Holdings [JSE:SAN] is surprising as the share is inexpensive, while its critics are citing concerns that affect the entire construction industry, reads an investment report.
Sanyati Holdings is trading at a significant share price discount to its peers, Erbacon Investment Holdings [JSE:ERB] and Wilson Bayly Holmes-Ovcon [JSE:WBO]. The group is currently valued at about 40% below its fair value of 65c, Standard Bank Group [JSE:SBK] said in a research report last week. The share was trading at 41c by 11:00 on Monday.
"This is a case of a not-so-great business that is a great investment," said Standard Bank analyst Keith McLachlan.
According to McLachlan, the market is overly pessimistic on the construction industry, but Sanyati is bearing the brunt.
He said this is due to a combination of the group's earnings underperformance relative to its peers, the share's small cap status and the potential of significant goodwill write-offs.
Sanyati CEO Malcolm Lobban said the group's share price also leaves him dumbfounded.
"There's a lot of liquidity in our share," said Lobban. "Unit trusts with small caps especially have a nice, easy way in and out. We are relatively young, with new management, and people are saying: let's wait and see what the industry is doing."
According to Lobban, the market is also discounting the civil engineering and construction group against its forward tangible net asset value.
During the heydays of World Cup and government infrastructure spend, construction firms bought subsidiaries to increase capacity to enable them to execute large or specialised projects.
The purchase prices of these acquisitions were made when price to earnings multiples were high and factored in intangible assets like intellectual property, said Cadiz Asset Management equity analyst Mpandekazi Maneli.
"However, after the World Cup and amid uncertainty regarding government's planned R846bn infrastructure spend, the construction industry's visibility of the future is impaired," said Maneli.
The market now believes the company overpaid for its past acquisitions.
"The market is now pricing this stock for bankruptcy," said McLachlan. But comparing the group's return on equity and its price to book ratios, Sanyati is showing the best value in the sector at its current price, he said.
"This is a great investment because it is so marked down," said McLachlan.
"This issue is not isolated to Sanyati," said Dirk Noeth of Avior Research. "The construction companies are all in the process of writing down the value of their acquisitions."
According to Noeth, market concerns also include shrinking order books. "It's going to be a very flat year for the industry; smaller order books, increased competition leading to lower margins, and the group's high degree of government exposure are all concerning."
- Fin24.com
Sanyati Holdings is trading at a significant share price discount to its peers, Erbacon Investment Holdings [JSE:ERB] and Wilson Bayly Holmes-Ovcon [JSE:WBO]. The group is currently valued at about 40% below its fair value of 65c, Standard Bank Group [JSE:SBK] said in a research report last week. The share was trading at 41c by 11:00 on Monday.
"This is a case of a not-so-great business that is a great investment," said Standard Bank analyst Keith McLachlan.
According to McLachlan, the market is overly pessimistic on the construction industry, but Sanyati is bearing the brunt.
He said this is due to a combination of the group's earnings underperformance relative to its peers, the share's small cap status and the potential of significant goodwill write-offs.
Sanyati CEO Malcolm Lobban said the group's share price also leaves him dumbfounded.
"There's a lot of liquidity in our share," said Lobban. "Unit trusts with small caps especially have a nice, easy way in and out. We are relatively young, with new management, and people are saying: let's wait and see what the industry is doing."
According to Lobban, the market is also discounting the civil engineering and construction group against its forward tangible net asset value.
During the heydays of World Cup and government infrastructure spend, construction firms bought subsidiaries to increase capacity to enable them to execute large or specialised projects.
The purchase prices of these acquisitions were made when price to earnings multiples were high and factored in intangible assets like intellectual property, said Cadiz Asset Management equity analyst Mpandekazi Maneli.
"However, after the World Cup and amid uncertainty regarding government's planned R846bn infrastructure spend, the construction industry's visibility of the future is impaired," said Maneli.
The market now believes the company overpaid for its past acquisitions.
"The market is now pricing this stock for bankruptcy," said McLachlan. But comparing the group's return on equity and its price to book ratios, Sanyati is showing the best value in the sector at its current price, he said.
"This is a great investment because it is so marked down," said McLachlan.
"This issue is not isolated to Sanyati," said Dirk Noeth of Avior Research. "The construction companies are all in the process of writing down the value of their acquisitions."
According to Noeth, market concerns also include shrinking order books. "It's going to be a very flat year for the industry; smaller order books, increased competition leading to lower margins, and the group's high degree of government exposure are all concerning."
- Fin24.com
