MY frost-covered lawn reflects much of the sentiment I currently have on the stock market. About to write on the trading update of Murray & Roberts, I shivered more from the latest disappointing interim results of another counter in the Private Investor portfolio, Hudaco.

I’ll return to Hudaco in due course and focus today on M&R.

In M&R’s trading update, bottom-line diluted headline earnings per share for the year ended June 30 2009 are expected to increase in a range of 15% to 20% on those in the 2008 financial year. This is a downward revision from the forecast made earlier.

When the Private Investor portfolio bought the shares at R69,60 a share in August 2007, the expectation was that the company would average annual bottom-line earnings growth of about 30% for several years. It was already known that M&R had expected to report doubled bottom-line earnings for the 2007 financial year. The share price of R69,60 (R71,08 gross) — buoyed by positive technical indicators — had exceptional value.

The market view was much the same. The trading update was confirmed when the annual results for 2007 were published and the share price reached R112 on October 30 2007.

Sentiment couldn’t quite remain at that feverish temperature but the share price traded mostly around R80 before reaching R109 in September last year, after its 70% rise in bottom line earnings for the financial year 2008.

The global economy has crumpled since then. M&R’s order book in the Middle East suffered but was bolstered again by increased demand, mainly for domestic infrastructure. Its share price on Friday was R49,05.

Based on historic market ratings and on the 2008 financial year, this share price gives an earnings yield of 11,2%, a price earnings ratio of 8,9 and a dividend yield of 4%. If bottom line earnings have risen 15% (the lower figure of the 15% to 20% trading update range), the expected ratings for the financial year 2009 are respectively 13%, 7,7 and 4,6%.

These last ratings are almost history. The trading update contains a number of negative investment fundamentals — steel related stock write-downs, major project terminations and start-up delays and the adverse effects of the expectation of a stronger rand.

On the plus side, the order book has stabilised around R42bn and there is the potential award of major contracts primarily in the South African market.

Its operating margin is expected to be maintained between 7,5% to 10%.

I’ve put on my rose-tinted glasses and am guesstimating M&R should be able to have an operating margin of 10% in the financial year 2010 — I’m betting on a strong investment fundamental, its sound management.

My guesstimate for growth in bottom-line earnings per share is 30% in the financial year 2010, a figure of 822,5c.

As the Private Investor portfolio paid R71,08c a share, its forward earnings yield is, therefore, 11,6%, its price earnings ratio is 8,6 and its dividend yield is 4,1%.

These ratings are reassuring relative to the long-term criteria goals when the portfolio bought its shares. At the market price of about R49, if the rose-tinted guesstimate is right, a forward price-earnings ratio of about 6 says the price is undervalued.

Source: Business Day