Construction shares for the brave

Posted On Monday, 11 December 2006 02:00 Published by eProp Commercial Property News
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In order to capture further potential gains in construction companies in the new year one will have to be a brave investor, according to Old Mutual's Faroz Basa.

Construction IndustryThe sharp run-up in the share prices of South African construction companies this year has made the construction sector the place to be, but in order to capture further potential gains in the new year one will have to be a brave investor, Feroz Basa, equity analyst at Old Mutual Asset Managers (OMAM), said in a statement on Friday. 

Construction counters have gained between 70% and 100% in 2006, significantly outperforming every other JSE-listed share. "Had you bought Murray & Roberts at the beginning of the year, you would have benefited from a 93% increase in the share, while Aveng is up 79%, Group Five is 88% higher and WBHO has risen to 65%." 

"The irony is that many analysts, including myself, thought that these shares were already fully valued at the beginning of the year, but yet we've seen these steep prices rise anyway and they look like they are going higher, mostly on sheer hype," said Basa. "Normally construction shares trade at around a 20% discount to the FTSE/JSE Industrial Index because of the risk associated with their large projects, but currently they are trading at premiums of 20-30% - this illustrates how high the prices are on a historical basis." 

Basa noted that although the four companies' medium-term earnings growth was strongly underpinned by record order books, their current share prices implied that nothing will go wrong with any of their big upcoming projects.
"There is no room for error. If one of these companies has even one large contract that somehow goes wrong, we could see a sharp reaction in its share price. On the other hand, early next year we will be hearing who wins major construction contracts including the three new World Cup soccer stadiums and King Shaka Airport in Durban, and in reaction, the share prices could rise even further."
Basa advised investors holding the shares to keep a close eye on them and be ready for a jittery 2007. To sell them would be a difficult decision as fundamentals for the South African construction sector had never been better.
Basa expected 2007 and 2008 to be the real "crunch time" for the local construction industry with many of the government's mega-projects getting underway ahead of the 2010 deadline, not to mention the numerous new power stations costing 20 billion rand each and 60 billion rand of Transnet spending.

Meanwhile, the private sector would continue to spend with projects such as the 22 billion rand mini-city Waterfall Development in Johannesburg and the proposed US$1bn V&A Waterfront upgrades in Cape Town.
"The government is really only starting its infrastructure spending now, yet the construction companies have already recorded earnings growth of between 20-50% so far this year and they are expecting further increases of 50-60% for the six months to end-December, according to their own earnings updates. Their earnings from government projects have yet to make an impact on their top lines.
"So earnings growth for the industry as a whole is underpinned by excellent fundamental factors - it's just a question of how much higher the share prices can go as a result."


Last modified on Thursday, 17 October 2013 10:50

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