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Found it! Hitting the bottom

When will the good times come again? The construction industry looks to be knee-deep in its trough. Group Five [JSE:GBF] came out with another epically bleak trading statement. Fair enough: with an earnings yield of around 5% nobody expects it to be farting rainbows. Everyone knows the industry is struggling, and Group Five investors are still paying for the materials business Quarry Cats acquisition in 2008, so the share didn’t take too much of a tumble on the day of the announcement. The share has since stayed around 3000c.

The group expects its earnings per share to drop by between 45% and 55% for its 2010 year. This figure looks drastically different (and leaves you with a fully diluted earnings loss, down 205%) if you include the impairment drag from its materials division. Thanks again, Quarry Cats. At least its cash position is expected to still be strong. The group’s last results show it was still sitting on a sturdy R2bn cash pile. It will be interesting to see what’s happened to that sum over the past six months of its financial year as Group Five burned through more than R700m for the six months to end-December 2010 to fund working capital. Revenue will be under pressure and trade receivables won’t look much better as the down cycle affects the entire value chain in the industry.

In its desperation to find a silver lining in this market, Group Five says it will be re-entering the rest of Africa, where it already has something of a good reputation. The local and Middle East downturn is just not dissipating fast enough – despite its healthy cash pile – for it to wait out the cycle.

The stock is looking cheap, Quarry Cats impairments are almost done and the sector has hit its low, according to some market analysts. However, for now Finweek will wait on the sidelines for that first spark of recovery.
 
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