Mur­ray & Roberts and Ste­fanutti Stocks

Financial Mail - Investors Monthly - - Contents - Shaun Har­ris

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.

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