Expecting the expected
Dire times for some but WBHO ‘outstanding’
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.
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