Ex­pect­ing the ex­pected

Dire times for some but WBHO ‘out­stand­ing’

Finweek English Edition - - COMPANIES&MARKETS - LEANI WES­SELS leani.wes­sels@fin­week.co.za

CON­STRUC­TION COUN­TERS won’t see a rerat­ing any­time soon. Con­sen­sus fore­casts by an­a­lysts of the con­struc­tion com­pa­nies’ earn­ings show it’s un­likely share prices will start im­prov­ing and of­fer in­vestors some­thing to talk about. Since ma­jor Soc­cer World Cup projects were com­pleted and the SA Na­tional Road Agency wrapped up its Gaut­eng roads projects, the counter has shown growth of just 8% over six months. Earn­ings fore­casts – recorded on a monthly ba­sis and re­fer­ring to the same fu­ture date – for South Africa’s ma­jor con­struc­tion firms are still de­clin­ing. Olof Bergh, of San­lam Pri­vate In­vest­ments, says the mar­ket is also fac­tor­ing in those de­clin­ing fore­casts. The gen­eral feel­ing about this year’s earn­ings re­sults is in­creas­ingly bad. As the com­pa­nies’ earn­ings drop, so will their earn­ings mul­ti­ples look more ex­pen­sive.

Earn­ings ex­pec­ta­tions for Mur­ray & Roberts are dras­ti­cally de­clin­ing. “The group came from a strong po­si­tion – spo­ken up by man­age­ment – but then earn­ings were knocked by those rev­enue de­fer­ments that an­a­lysts didn’t like,” says Bergh. M&R has a to­tal of R1,4bn in un­paid con­tracts, the bulk con­sist­ing of work on the Gau­train project. Over the past 12 months the group’s share price fell by more than 14%.

How­ever, it isn’t only M&R’s out­stand­ing pay­ments knock­ing its earn­ings ex­pec­ta­tions. Most of the larger firms in the sec­tor show de­clin­ing earn­ings fore­casts, say an­a­lysts. Group Five’s earn­ings ex­pec­ta­tions dropped from 500c to 490c/ share from Novem­ber to De­cem­ber. Basil Read’s earn­ings fore­cast dropped from 300c to 260c/share over the same pe­riod.

So where to for in­vestors who be­lieve there’s still value in the sec­tor? The graph shows the best per­former dur­ing the re­cent down cy­cle was Wil­son Bayly Hol- mes – Ov­con (WBHO), with an im­prove­ment in earn­ings ex­pec­ta­tions from one month to the next. “WBHO has shown out­stand­ing out­per­for­mance in the con­struc­tion in­dex,” says Bergh. The group’s share price has in­creased by 30% over the past 12 months, com­pared with the counter’s rise of a mere 1%. WBHO is cur­rently win­ning an em­bar­rass­ing amount of con­tracts, says Bergh. “They’re sim­ply bet­ter op­er­a­tors than the oth­ers, with a good track record and who com­plete their projects in line with their bud­gets.”

Ex­pec­ta­tions for build­ing ma­te­ri­als sup­plier Cash­build are con­sis­tent ac­cord­ing to ex­pec­ta­tions. Al­though not purely a con­struc­tion com­pany (mak­ing it dif­fi­cult to com­pare) the group is a firm favourite among an­a­lysts and is of­ten called a solid, well-run com­pany in the con­struc­tion sec­tor.

Ac­cord­ing to those ex­pec­ta­tions, in­vestors should keep a close eye on their an­a­lyst’s news­let­ters re­gard­ing those stocks. A stock that’s been down­graded to a sell is the symp­tom of a share that’s run too hard or is per­ceived to have lit­tle value. An up­grade or a buy in­di­cates that de­spite the noise in the sec­tor and the negativity sur­round­ing such stocks, value still ex­ists.

MUR­RAY & ROBERTS Crys­tal Tow­ers Canal El­e­va­tion

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