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Johannesburg- Many small cap construction firms are expecting another set of poor results as the industry struggles with lower demand and tighter margins in a post-World Cup slowdown, according to the slew of trading updates released last week.
Fin24.com took a look at which of the small caps investors need to steer clear of, and those that can offer bargain-hunters an exciting alternative on the overbought JSE.
Stefanutti Stocks
Some good news amidst all the negativity is that shares in construction and building company Stefanutti Stocks Holdings [JSE:SFB] offer investors a true discount. This comes as pessimism pervades the construction industry after the 2010 Fifa World Cup, said Standard Bank analyst Keith McLachlan.
The share's price to earnings (PE) ratio is 4.81, compared to the industry average of 7.7 - a substantial discount.
"(Stefanutti) is our top pick due to the long operating history of its constituent businesses and almost 70% of its market cap being made up of net cash," McLachlan said in a research note to investors.
Despite reporting on Monday that it would post a drop in interim earnings of between 10% and 20%, the share price is close to pre-World Cup levels at R10.60.
"The fact is some average businesses are great investments because they're so cheap," said McLachlan.
Sanyati
As with many other construction companies, the market believed Sanyati Holdings [JSE:SAN] overpaid for its acquisitions at the peak of the cycle in 2008 and has priced the share at bankruptcy levels.
The share is currently trading at 41c, about 37% below its fair value of 65c, Standard Bank said in a research report.
The group's recent trading update, however, won't inspire many to regard the share as a bargain: normalised headline earnings for the six months to end-August are expected to be 50% lower than the previous interim results.
"It will take another two years for earnings to start flowing through," said Avior Research analyst Dirk Noeth. According to Noeth, it will be another year before the market recognises Sanyati's worth.
Afrimat
The apple of many an analyst's eye, cement group Afrimat [JSE:AFT] is expecting a slight earnings increase, according to its trading update released last week.
This is in stark contrast to the rest of the cement industry, which is reporting dwindling demand and anticipates recovery to take two years.
Afrimat's secret for success is that it reduced its exposure to the Western Cape market. Its quarries are located largely in South Africa's rural areas, which are showing growth while the traditional urban markets have stagnated.
The group said last week it expects a 3% increase in interim earnings for the six months to end-August. The share price is at R3.35, edging back to its 2008 highs of R3.50.
In a research note, stockbrokerage Imara SP Reid said the share is inexpensive and looks to have good operating traction. It called it a "speculative buy".
Esorfranki
Last week's trading update was the latest in what has become a series of poor results from construction group Esorfranki [JSE:ESR].
In the last 12 months the share price lost over half of its value, but a recent update warning of a massive 95% drop in earnings was a surprise to the market.
"The drop in share price post the recent trading update appears to indicate that the market was not expecting this extent of earnings disappointment," said Sanlam Investment Management portfolio manager Vanessa van Vuuren.
"However, management has been transparent about a number of once-off items that have affected their results in this period."
According to Van Vuuren, loss of turnover due to forced work stoppage over the World Cup and on-site delays with some of the group's larger projects, which were supposed to have started already, contributed to the poor earnings.
Imara SP Reid downgraded the share to "fully valued". It is currently trading at R2.06.
WG Wearne
Cement producer WG Wearne [JSE:WEA] announced on Monday in its interim results for the six months ended August that it would start selling off assets in an attempt to cover high debt repayments.
The news helped lift the illiquid share's price from 33c to 41c.
Bigger industry players expect local demand to recover only in two years' time.
This, combined with the fact that there is little confidence left in Wearne's management after its debt-incurring activities over the last few years, means the share is unlikely to shrug off its dog status anytime soon.
- Fin24.com
Fin24.com took a look at which of the small caps investors need to steer clear of, and those that can offer bargain-hunters an exciting alternative on the overbought JSE.
Stefanutti Stocks
Some good news amidst all the negativity is that shares in construction and building company Stefanutti Stocks Holdings [JSE:SFB] offer investors a true discount. This comes as pessimism pervades the construction industry after the 2010 Fifa World Cup, said Standard Bank analyst Keith McLachlan.
The share's price to earnings (PE) ratio is 4.81, compared to the industry average of 7.7 - a substantial discount.
"(Stefanutti) is our top pick due to the long operating history of its constituent businesses and almost 70% of its market cap being made up of net cash," McLachlan said in a research note to investors.
Despite reporting on Monday that it would post a drop in interim earnings of between 10% and 20%, the share price is close to pre-World Cup levels at R10.60.
"The fact is some average businesses are great investments because they're so cheap," said McLachlan.
Sanyati
As with many other construction companies, the market believed Sanyati Holdings [JSE:SAN] overpaid for its acquisitions at the peak of the cycle in 2008 and has priced the share at bankruptcy levels.
The share is currently trading at 41c, about 37% below its fair value of 65c, Standard Bank said in a research report.
The group's recent trading update, however, won't inspire many to regard the share as a bargain: normalised headline earnings for the six months to end-August are expected to be 50% lower than the previous interim results.
"It will take another two years for earnings to start flowing through," said Avior Research analyst Dirk Noeth. According to Noeth, it will be another year before the market recognises Sanyati's worth.
Afrimat
The apple of many an analyst's eye, cement group Afrimat [JSE:AFT] is expecting a slight earnings increase, according to its trading update released last week.
This is in stark contrast to the rest of the cement industry, which is reporting dwindling demand and anticipates recovery to take two years.
Afrimat's secret for success is that it reduced its exposure to the Western Cape market. Its quarries are located largely in South Africa's rural areas, which are showing growth while the traditional urban markets have stagnated.
The group said last week it expects a 3% increase in interim earnings for the six months to end-August. The share price is at R3.35, edging back to its 2008 highs of R3.50.
In a research note, stockbrokerage Imara SP Reid said the share is inexpensive and looks to have good operating traction. It called it a "speculative buy".
Esorfranki
Last week's trading update was the latest in what has become a series of poor results from construction group Esorfranki [JSE:ESR].
In the last 12 months the share price lost over half of its value, but a recent update warning of a massive 95% drop in earnings was a surprise to the market.
"The drop in share price post the recent trading update appears to indicate that the market was not expecting this extent of earnings disappointment," said Sanlam Investment Management portfolio manager Vanessa van Vuuren.
"However, management has been transparent about a number of once-off items that have affected their results in this period."
According to Van Vuuren, loss of turnover due to forced work stoppage over the World Cup and on-site delays with some of the group's larger projects, which were supposed to have started already, contributed to the poor earnings.
Imara SP Reid downgraded the share to "fully valued". It is currently trading at R2.06.
WG Wearne
Cement producer WG Wearne [JSE:WEA] announced on Monday in its interim results for the six months ended August that it would start selling off assets in an attempt to cover high debt repayments.
The news helped lift the illiquid share's price from 33c to 41c.
Bigger industry players expect local demand to recover only in two years' time.
This, combined with the fact that there is little confidence left in Wearne's management after its debt-incurring activities over the last few years, means the share is unlikely to shrug off its dog status anytime soon.
- Fin24.com
