Silver lining for shunned construction shares
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.