In the grip of the bear
Not a time to buy construction shares
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.
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.