In the grip of the bear

Not a time to buy con­struc­tion shares

Finweek English Edition - - MONEYCLINIC - LU­CAS DE LANGE bdl@vo­

THE CON­STRUC­TION SEC­TOR is cur­rently un­pop­u­lar, but there are com­men­ta­tors who are rec­om­mend­ing it for in­vestors who are pre­pared (and have the courage) to look on it as a con­trar­ian play.

It’s a well-known fact that it can of­ten be par­tic­u­larly prof­itable to swim against the tide when cycli­cal com­pa­nies are in the throes of ad­ver­sity – as ex­pe­ri­enced re­cently by mo­tor ve­hi­cle com­pa­nies. Any­one who ac­cu­mu­lated shares in Im­pe­rial, CMH or Me­tair in the dark days at yearend 2008 and early in 2009 is cur­rently en­joy­ing prof­its aris­ing from in­creases rang­ing from 180% for Im­pe­rial to 377% for Me­tair.

The volatil­ity of con­struc­tion shares is ev­i­dent from Aveng’s turn­around from its bear mar­ket low of 695c in 2004 to its bull mar­ket high of 7292c in Oc­to­ber 2007 – close on a 950% in­crease. But it was fol­lowed by a near 70% drop to a low of 2333c. Its share price is cur­rently again un­der pres­sure at around 3500/3600c.

Should the ad­vice of an­a­lysts who be­lieve one can start buy­ing Aveng be taken se­ri­ously? The re­al­ity is that there are many con­cerns about the group that, with a mar­ket cap­i­tal­i­sa­tion of more than R14bn, dom­i­nates the sec­tor. In its hal­fyear to De­cem­ber 2010 it per­formed poorly, with head­line earn­ings per share fall­ing 34% to 98,2c. But what counts in its favour is that its in­ter­ests are wide-rang­ing over the con­struc­tion and en­gi­neer­ing in­dus­tries. It’s also wide­spread ge­o­graph­i­cally. It was pre­cisely the poor per­for­mance of its con­struc­tion and en­gi­neer­ing divi­sion in Aus­trala­sia and the Pa­cific re­gions that heav­ily im­pacted it. Its op­er­at­ing in­come there fell 50,6%, while the op­er­at­ing mar­gin de­clined sim­i­larly to just 2,1%.

Man­age­ment partly blames the strong Aus­tralian dol­lar, which recorded a new high dur­ing the past week, for that poor per­for­mance.

By con­trast, its African op­er­at­ing in­come rose slightly de­spite turnover fall­ing 7,5%. Africa pro­duced around 49% of group rev­enue and its op­er­at­ing mar­gin rose to 5,1% (4,6%). Man­u­fac­tur­ing and pro­cess­ing also fared poorly, show­ing a loss, while net fi­nance in­come tum­bled 23%, ow­ing to lower cash bal­ances and low in­ter­est rates.

Mool­mans, the


min­ing seg­ment, per­formed well. Turnover rose 14,7% and op­er­at­ing in­come al­most 50% af­ter the op­er­at­ing mar­gin lifted to 11,6% (8,9%). This divi­sion con­trib­uted 40,5% to op­er­at­ing profit.

Like most of SA’s other con­struc­tion groups, Aveng’s man­age­ment also com­plains about de­lays in the award­ing of Gov­ern­ment con­tracts. The im­ple­men­ta­tion of two large and highly tech­ni­cal projects is also prov­ing a headache.

So, from a fun­da­men­tal point of view there’s lit­tle to get ex­cited about, par­tic­u­larly as competition is cur­rently so strong. The tech­ni­cal mes­sage is also neg­a­tive, as is ev­i­dent from the ac­com­pa­ny­ing price graph. Al­though the mov­ing av­er­age (MA) is mov­ing side­ways over the long term (40 weeks), the medium term MA (13 weeks) has fallen be­low that of the long term, which can of­ten be re­garded as a warn­ing the bear is tak­ing con­trol of a share due to steady sell­ing by ma­jor play­ers. Fur­ther de­clines are pos­si­ble, which co­in­cides with a weak­en­ing ad­vance/de­cline line* of the mar­ket as a whole. Here the 13-week MA turned down, which was given as a warn­ing in Finweek on 3 Fe­bru­ary.

How­ever, it’s pos­si­ble there could be an up­turn, given the over­sold sta­tus of the rel­a­tive strength in­dex. An im­prove­ment such as this should be seen – in the light of the in­di­ca­tors above – as an op­por­tu­nity to sell. From a tech­ni­cal view­point, Aveng can there­fore not be re­garded as a buy at this stage. That also ap­plies to the other big shares in the sec­tor on the JSE. * The ad­vance/de­cline line shows how many shares (daily or weekly) have risen against the num­ber of falls. A fall­ing 13-week MA re­flects in­ter­nal mar­ket weak­en­ing.

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