Taking Stocks for future

Posted On Friday, 04 July 2008 02:00 Published by eProp Commercial Property News
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One of the top three or four construction companies in SA within the next few years — that’s the target status for Stefanutti & Bressan (S&B), as a sequel to its impending R1,1bn acquisition of unlisted Stocks Limited. Competition commission approval is expected by the end of July.

Willie MeyburghS&B has a market capitalisation of R2,4bn. When it listed in August last year the issue was 21 times oversubscribed. After going in at R12/share, S&B has traded as high as R27 but dropped in recent months to around R15,50.

In a joint statement the companies said the merger would position the enlarged group “as a major competitor in the first-tier construction sector, with almost R5bn turnover and 8 000 employees”, and it is not seen as a cost cutting exercise.

Stocks Building Africa was launched in 2001, after the old Stocks & Stocks was taken off the exchange as a consequence of some tough times. Management bought out what was left.

S&B CEO Willie Meyburgh says S&B heard that Stocks was interested in listing again, and that S&B had convinced the company that throwing in its bulk with S&B was the smarter move.

The industry in SA is dominated by a few large companies in terms of capacity. At the top are Murray & Roberts and Aveng subsidiary Grinaker-LTA; in the second tier are Group Five and Wilson Bayly Holmes (WBHO); and the smallest of the traditional big five is Basil Read.

There is not much competition in the top two tiers, and this allows these contractors a lot of leeway when it comes to negotiating price.

“We would like to be in the same league as the Group Fives and WBHOs, and in time get to the level of M&R and Grinaker,” says Meyburgh.

“We need to upscale to be able to take on the larger projects on our own, so that we can keep more of the margin for ourselves. It will also raise the profile of the company.

“Our competitors know the name Stefanutti & Bressan, but investors and the public in general don’t really know the company or the quality of the company.”

Before embarking on this deal, S&B had wanted to diversify itself geographically. “We said we wanted to get into first-class emerging markets such as Dubai or Abu Dhabi,” says Meyburgh.

The transaction entails a swap of about 40m shares, while Rand Merchant Bank — a substantial shareholder in the unlisted Stocks — will be paid R382m by S&B for its stake.

S&B already has a strong offering. The group is well established in civils (concrete structures such as bridges) and construction. It is also exposed to mining, which is expected to continue investing in new capacity. S&B builds and maintains slimes and tailings dams, and is involved in contract mining for open pit mines.

The group also has well-established building divisions in the Western Cape and Gauteng, with a smaller presence in KwaZulu Natal — where Stocks has a strong presence.

The deal may have come at a good time for Stocks, as a slowdown in building is expected after consecutive interest rate rises.

It will be up to the Stocks team to take advantage of the Gulf area, where petrodollar-funded building activity appears to be isolated from global economic pressures. Stocks has a handful of small joint ventures operating in three of the Arab emirates, which S&B are hoping to be able to leverage off into larger contracts.

Perhaps the biggest and most valuable gain for S&B is an experienced team of managers with a strong entrepreneurial flair. Gino Stefanutti, S&B’s founder and chairman, says: “People have asked us, ‘Why are you buying a building company?’ but we say that this is mainly a construction company. For example, if you look at the work they have done at Cape Town airport, the parking lot — it’s a civil's job. These people can be returned to civil's any time,” says Stefanutti.

“The beauty about Stocks is that they are owner-managed. They were all part of the leveraged management buyout — they are just like us. We get on well. Like us they are contractors and not professional managers.”

With more bodies on board, S&B will be able to staff the stream of larger projects that it expects to win tenders on. Government has committed itself to spending about R515bn over the next three to five years, with more work likely to follow.

Meyburgh says the group has a vision of reaching turnover of R10bn within the next three years. A double-digit operating margin is also being pursued.

Though the Stocks acquisition will dilute operating margins slightly (7,2% in financial 2008), it will be earnings-enhancing. The value of the merger will only really make itself felt in February next year. At that point there will have been at least seven months of Stocks trading in the numbers.

On a forward p:e of 12 for S&B, it seems the market is missing out on yet another trick. Meyburgh says the company is going to perform better than its forward p:e would lead one to believe, emphasising that at these levels there is a lot of value to be had.

 

Last modified on Tuesday, 08 October 2013 11:21

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