CHEAP AND NASTY may do it for some but Protech Khuthele Holdings shares are looking a little too easy for this amateur investor. Its share price is already reflecting the concerns faced by many other construction firms: high gearing, low margins and an industry that may take years to fully recover from the building slump. Trading at a discount to its tangible net asset value – 63c versus 87,2c/share – it’s easy to lump it with other undervalued quality shares in the sector, such as Basil Read and Sanyati.
However, many brokerages are adopting a wait-and-see approach to the stock as the group’s mining work, which was supposed to counter the current feeble construction conditions, takes some time to take off. PSG Online suggests avoiding it and Imara SP Reid maintains the share is a hold.
At its dismal results presentation in November, management said it expected the tough market to remain for the time being, which means margins won’t be improving anytime soon. Rainfall, the cost of mining safety compliance and the realignment of equipment eroded the group’s operating profit by 47% in its last financial year. The share has since reached a 12-month low of 58c and is expected to remain at that level until its bulk earthworks and civils segments embark on a slow recovery to flat revenues in 2012.
Why analysts haven’t written it off completely is largely due to confidence in new CEO Julian Dovey, who has a 15-year track record at the company. Exposure to the coal industry is also still an attractive carrot to some investors.
However, until the bulk of Protech’s work moves away from the low-margin coal mining industry to public and private infrastructure projects, the group’s profits are expected to remain poor. Finweek suggests looking elsewhere for a value play in the sector until Government starts loosening its purse strings.