Johannesburg - A slew of negative data about the building materials sector doesn't mean there aren't any good listed building companies worth investing in, says an analyst.
"Investors should look at company earnings and not economics to make investment decisions," Sasfin's David Shapiro told Fin24.com.
The continuing slide in confidence as well as cement sales statistics and the number of building plans passed by larger municipalities all point to recession in the sector. Because of these factors, said Shapiro, investors would tend to shy away from building materials companies.
"Rather look out for the earnings they report than make assumptions about the sector based on the statistics. I think it's difficult to reconcile cement sales with some of those players," said Shapiro.
Building materials retailer Cashbuild's most recent set of results shows that the bulk of profits come from cement sales. This is despite cement sales being down 6.7% at 3.131 million tons for the first quarter in 2009, compared to the same time in 2008.
"There's an informal sector out there that seems to give this whole market an underpin. So if you look at your cement sales, that data don't really sit in," said Shapiro.
"The statistics don't take into account what the informal sector and people living in rural areas and near smaller municipalities are doing; as Cashbuild targets that market, it gives a true reflection of how cement sales are actually performing," he said.
He also said lower income earners in rural areas were less likely to have building plans approved by a municipality, and would just buy building materials and start with construction - another factor which doesn't give a true reflection of the amount of building and renovation taking place.
"You'd probably find people [in that market] are building houses room by room or doing it themselves over weekends. People who live in the suburbs might not see it, but drive out into a squatter camp or drive to Mpumalanga, you see this happening.
Look at lower end consumers
"The statistics don't take this into consideration, and that's why the earnings of Cashbuild were so surprising. Investors should ignore the statistics and start seeing what the earnings are doing."
Shapiro said Cashbuild was not comparable with other suppliers like Distribution and Warehouse Network (Dawn) or Builders Warehouse as they have different target and supplier markets.
According to Coronation Fund Manager Alistair Lea, this is "the same reason" why food retailer Shoprite is outperforming Woolworths: "The lower end consumer is in good shape."
Lea agreed that possible job losses triggered by the global economic downturn threatened Cashbuild's earnings. However, he said that retrenched workers would probably receive cash from a retrenchment package, which would "probably accelerate the building they were doing anyway".
If job losses were to hurt the group's earnings, it would only be in the latter part of 2009 or in 2010, said Shapiro.
Cement is still being used in many road building and civils projects, so there's still good demand, said Shapiro. "PPC is well placed there, better placed perhaps than some of the other suppliers."
The SA Reserve Bank's monetary policy committee has taken an aggressive stance to play catch-up with rate cuts in Europe and the US.
Analysts expect interest rates to be cut by a further 250 basis points, bringing the total reduction to five percentage points and yielding a prime overdraft rate of 10%.
"Maybe residential building has come off the boil, but it's still quite difficult to tie it [the economic data] all up. We shouldn't tie these economic issues up with building and construction companies," said Shapiro.
"That's why sometimes it's better to focus on the companies themselves rather than to look at the statistics and the economic data."
- Fin24.com