TRADE OF THE MONTH
Murray & Roberts and Stefanutti Stocks
Investors are rightly nervous about the construction industry. Profit margins are slashed, government’s infrastructure programme is still short a few bricks, and nearly all the listed construction companies have been fined or are still under investigation for tender collusion. Who dares enter these creaking halls?
Quite a few asset managers, it turns out. As with any industry under duress, there are pockets of value and pockets of destruction. IM puts Stefanutti Stocks in the first camp and Murray & Roberts (M&R) in the second. It should be a profitable trade.
M&R put out horrible interim results for the six months to December 31 2014. HEPS were up (that is diluted continuing HEPS), but everything else was down. The order book is still a sturdy R37,8bn but that’s way below the previous period’s R44,9bn. And prospects are like a face against a brick wall.
Said CEO Henry Laas at a presentation at the Merrill Lynch Investor Conference in March: “The operating environment remains challenging, not only for M&R but for the entire engineering and construction sector, both in SA and further afield.” Investors must have run from the presentation with cheque books firmly in hand, not looking back.
Stefanutti published glittering interims, though decent financial results have been a long time coming. But what’s got the market excited is the trading statement it released in March. It said both EPS and HEPS were expected to increase by between 55% and 75%. Though much smaller than M&R’s, the order book is still a healthy R12,7bn. It has R1bn cash on hand and has reduced finance costs by R7m by reducing interest-bearing debt by R108m, putting the company on a debt:equity ratio of 24%.
This is what investors like to see, cash and a lean balance sheet.
M&R is going the other way. “The operating cash flows raise concerns as, on a continuing basis, they were down from an inflow of R1,1bn to an outflow of R659m. The net cash position has narrowed 55% to R884m,” writes Imara. It has the share as a sell on a price of R14,29. At the time of writing the share was on R13,63.
Imara has Stefanutti on hold at R6,30 (price R5,20 at time of writing), saying it may positively review that when it sees results.
Both companies have been naughty boys, as have most in the construction industry. M&R has paid R309m for contravening the Competition Act. It now faces a R428m civil claim from the City of Cape Town for allegedly colluding on stadium tenders.
Stefanutti has paid two instalments to the Competition Commission of R81,5m each, and must pay two more of R212m.
But institutional investors are buying the shares. Kagiso Asset Management bought M&R shares in February, bringing its total interest in the company to 5,09%. Sanlam Investment Management (SIM), which has long been bullish on Stefanutti, bought shares in January to bring its interest to 25,14%.
The later decision was probably influenced by SIM portfolio manager Vanessa van Vuuren, who rates Stefanutti a “strong buy”. She says there is risk because of possible civil claims coming from collusive acts, and possible contract losses from key clients. But she feels the bad news is in the share price.
Intellidex also thinks the share is high risk but likes it, saying it has upside of 21%.
There are times when investors have to take higher risks to get decent returns. But not with M&R. No interim dividend was declared and the company says it is developing an attractive dividend policy. It might be a long wait to get a payout.
Stefanutti has not paid a dividend either, since 2012, but one should arrive sooner. An earnings multiple of 3,4 is compelling and the share price is below half of net asset value.