Sil­ver lin­ing for shunned con­struc­tion shares

Financial Mail - Investors Monthly - - Editor’s Note - ROB ROSE email Rob on roser@fm.co.za

FOR MONTHS now, con­trar­i­ans have been urg­ing peo­ple to pile into con­struc­tion shares, based on the dizzy­ingly op­ti­mistic idea that once the tide turns, th­ese unloved stocks will (again) charge for the strato­sphere.

It’s car­nage out there now: Mur­ray & Roberts is 77% down since 2010, Aveng is 93% down and Group Five is 48% lower.

Their de­fend­ers are quick to blame gov­ern­ment for this: not enough in­fra­struc­ture spend­ing from the state, they point out quickly. In any event, they say, the in­vest­ment en­vi­ron­ment is so poor, th­ese guys had no choice but to col­lude to turn a buck.

While it’s true that gov­ern­ment sat on its hands when it should have been spend­ing, the fact is the con­struc­tion com­pa­nies wrote their own sorry script by col­lud­ing to rig ten­ders.

As Rei­tumetse Pitso chron­i­cles in her ab­sorb­ing cover story in this edi­tion, it wasn’t just a few crooked projects ei­ther.

In all, the con­struc­tion firms col­luded on 298 projects with a com­bined value of R111,9bn. Had the com­pa­nies not bro­ken the com­pe­ti­tion rules, their share prices to­day would be a lot stronger.

An anal­y­sis by the com­pe­ti­tion com­mis­sion’s Hariprasad Govinda shows that af­ter the com­mis­sion an­nounced on Fe­bru­ary 1 2011 that it would be tack­ling the com­pa­nies for bid rig­ging, their share prices broke with their trend and tanked.

Take Aveng: be­fore that no­tice, it had “an ab­nor­mal re­turn of 2,95%” above the JSE’s in­dex — in other words, it was do­ing bet­ter than ex­pected. But on the day of the an­nounce­ment, it lost 14% of its value on the JSE, and within 20 days, its “ab­nor­mal re­turns” were sit­ting at a neg­a­tive 15,2%.

“The share prices re­acted neg­a­tively in a sta­tis­ti­cally sig­nif­i­cant man­ner to the an­nounce­ment of the con­tra­ven­tion,” said Govinda.

They all got ham­mered — both from a rep­u­ta­tion per­spec­tive and in value.

Of course, those com­pa­nies would have lost value any­way, given that the con­struc­tion cy­cle turned against them. But the col­lu­sion was the cat­a­lyst — and it meant the fall was far faster and more dra­matic than any­one ex­pected.

Even to­day, this cloud still hangs over them, in part be­cause some of the firms are still fight­ing the com­mis­sion over the fines im­posed — WBHO in par­tic­u­lar.

There is a sil­ver lin­ing for in­vestors, how­ever. As we de­tail in our cover story, the pos­si­bil­ity of con­sol­i­da­tion be­tween the com­pa­nies presents some hope.

True, there might be scant work to go around right now. But com­bin­ing the deal pipe­line, and strip­ping out cor­po­rate costs, would help po­si­tion them for when the cy­cle turns. It would also in­crease their bar­gain­ing po­si­tion when it came to ten­der­ing for work. Per­haps if they’d done that years ago, rather than meet­ing in smoke-filled rooms, it might be a dif­fer­ent, less nasty, story to­day.

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