Long-awaited SA infrastructure development looks set to begin with Eskom capex announcements approaching R93-billion, Transnet capex announcements approaching R40-billion, the Gautrain project placed, and considerable 2010 Soccer World Cup spending on the way. Rajay Ambekar from African Harvest suggests certain JSE companies may benefit enormously

LINDSAY WILLIAMS: Exciting times for the construction industry - can you tell us which ones are going to benefit more than others?

RAJAY AMBEKAR: Overall for the construction sector it’s very good to see, finally, some spend coming through from government. There’s been a lot of talk about it in the past - but Gautrain is hopefully just the beginning of more positive spending and growth to come, especially from the government sector. I think the usual suspects are in the construction industry - Murray & Roberts and Aveng which are tier one construction companies. They’re exposed to more of the larger scale infrastructure projects that are likely to come through from government now. I see them as probably the primary beneficiaries of this construction spend.

LINDSAY WILLIAMS: But do you think their current share valuations are already discounting this spending - or is there more to come?

RAJAY AMBEKAR: That’s the problem - I think, largely, most of the spending that’s due to come has already been priced into their share prices. If we look at the construction sector it’s probably trading at a market rating - whereas historically it traded at about a 20% to 25% discount - so I think a lot of the good news has been priced into the shares. If I had to pick from the two - I’d probably pick Murray & Roberts with the Gautrain win they announced recently.

LINDSAY WILLIAMS: So tier one is Murray & Roberts. What about tier two - if that’s the way you want to categorise it? What are the smaller companies that are going to benefit?

RAJAY AMBEKAR: The tier two companies will be some of the smaller construction players like WBHO and Group 5. If you look at their share prices over the last couple of years - they’ve had enormous runs. This has been partly, obviously, on the residential boom - they’re more exposed to smaller scale residential projects, and commercial projects, retail projects - so their share prices have had quite a good run on this residential boom. But with this work that’s expected to come there will be lots of smaller projects - and they should also benefit from that.

LINDSAY WILLIAMS: If you look at the peripheral stocks, they are going to be the ones that are more challenging. I always remember people saying you don’t make money out of airlines, but out of airports and the land surrounding the airports - let’s say the airport’s being built, and the plane has landed - what about outside the airport? Are there any stocks that might actually benefit as a spin-off to these massive, massive developments we’re talking about?

RAJAY AMBEKAR: There will be, certainly, I think with the developments there’ll be more money in the economy, and there will probably be a bit more consumer spend. Looking at the other companies that might also benefit from being involved in these type of projects - things that come to mind are, for example, companies like Mittal Steel or Bell Equipment. Mittal Steel sells about 60% of its steel locally - with these projects the demand for steel will rise. Bell is a small player - they make articulated dump trucks, and other heavy duty vehicles used in construction projects - so that’s another one to keep an eye out for, Bell Equipment.

LINDSAY WILLIAMS: Eskom was talking about the R93-billion de-mothballing or re-commissioning of certain power stations. Any companies that are very niched that might benefit from that sort of thing - or have you already dealt with them?

RAJAY AMBEKAR: Two that come to mind - with regard to that - are companies like Reunert and Altech. You have to look at the subsidiaries within these companies - for example Reunert has a subsidiary called African Cables, and Altron has a subsidiary called Powertech. Both of these companies are involved in cabling, transformers, power systems - so these companies should also benefit quite nicely from Eskom’s spend, although in the larger group the subsidiaries might not be such a big proportion.

LINDSAY WILLIAMS: What about 2010 World Cup? Tourism, obviously, will be boosted - not just in the very short term as hundreds or thousands of visitors come for that specific event, but obviously there’ll be a spin off in later years as they decide they like South Africa - and it becomes a repeat destination? Would you look at transport, tourism, car hire, that sort of thing?

RAJAY AMBEKAR: Yes, those are probably longer term companies to look at. The ones that do come to mind are companies like Tourvest - which has a large share of the South African inbound market - and a Barloworld subsidiary like Avis that operates in the car rental market. These companies will definitely benefit from the inbound tourism - and I think longer term as well. If South Africa becomes an attractive destination it will definitely help these companies.