Johannesburg - Despite the underperforming the market so far this year, the construction sector may reward investors in coming months, analysts say.
Construction companies have not been well-liked by the market this year, even after a fairly large derating in 2008, said Stanlib fund manager Lance Krowitz. The JSE's construction and materials index is up by 1.5% since the start of 2009, trailing a gain of 3.9% in the all-share index.
The sector has been hit a sharp slowdown in local private sector work, with cancelled contracts in the Middle East affecting companies like Murray & Roberts and Group Five.
But Krowitz thinks the sector offers good value.
"Company fundamentals remain strong, with good balance sheets generally and good earnings prospects from the larger stocks as well as the very small ones, like Esor and SeaKay," said Krowitz.
"As it will take some time for private sector and residential spend to recover, performance will largely depend on what government does in the next few months."
Should government announce continued spending for the next few years, these companies should do well, Krowitz added.
"Companies that are exposed mostly to the private sector residential market or 'shopping centre' market are struggling; however, those that are road builders and have some exposure to the government infrastructure build programme should continue to do relatively well," he said.
Vestact's Sasha Naryshkine also sees a potential recovery in construction counters in coming months.
"If you are looking for reasons to see a pick-up in the year, (there are) the overall risk lower for equities, demand for yields and the belief that government infrastructural spend is intact."
New cabinet could complicate matters
He said companies like Murray & Roberts, PPC, Raubex and Wilson Bayly Holmes-Ovcon were all expected to show growth in headline earnings and dividends over the next year.
Naryshkine expects Murray & Roberts' headline earnings per share to grow by 18.9% over the next year, with its dividend per share to rise by 5.9%. Cement producer PPC should post earnings growth of 8.6%, with double-digit dividend growth of 11.1%.
Imara SP Reid analysts Stephen Meintjes and Warwick Lucas also see Murray & Roberts profit and share price performance steadily improving. "Basil Read, which is smaller and faster, is coming off a much lower base."
But the coming months won't be easy.
Industry Insight construction CEO Elsie Snyman said the broader construction industry is experiencing hardship.
"We have experienced first-hand the effect of the investment slowdown in new building construction, as companies are closing factories, cutting jobs and in some cases being voluntarily liquidated. Confidence levels will take time to react to recent monetary easing, while liquidations continue to increase rapidly. Job losses must first be re-absorbed and new jobs created before the economy will be fully back on track".
All this takes time, and to add salt to the wounds, South Africa has an almost entirely new cabinet, she said.
"This could slow the implementation of new government projects in the short term, although the longer-term benefit may be a more streamlined, focused, effective government that will accept accountability for infrastructure expenditure."
For many companies, the immediate challenge remains to survive 2009.
"Companies, now more than ever, require intensive strategic planning in order to survive in these difficult times. Those companies that have a solid foundation in the South African construction industry will probably be able to get through these times, but smaller- to medium-sized firms - particularly those with excessive exposure in one or two market segments - will find it difficult to survive," said Snyman.
- Fin24.com