Flickers of hope
AFTER MONTHS of silence, good news is finally trickling in from South Africa’s construction sector. Basil Read, the latest company to report a new multibillion rand project, has plumped up its order book. A R1,5bn Majwe mining joint venture on contract with Debswana Diamond in Botswana saw the group’s price climbing back to around 1260c, a three-month high. The entire counter flickered upwards on the news.
So are investors finally easing up on construction stocks? Not quite, say analysts. A rerating is still some time off, because earnings will remain under pressure even as order books are beginning to resemble their pre2010 selves again. As at year-end 2010, there will be brief blips of confidence – only to give way again to industry-wide pessimism.
Murray & Roberts won a R4bn contract to build a hospital in Abu Dhabi, and Raubex, along with Sanyati, are currently in final negotiations for a R720m roads project in Uganda.
The N1/N2 Winelands toll road project is also expected to be awarded this month, which should suck up some excess capacity from the market and leave the rest of the companies with breathing space and, importantly, some negotiating power.
Currently, all SA’s heavy construction shares, save for Murray & Roberts, are trading at earnings multiples below nine, heavily discounted as investors hold out for the trough of the current down cycle. Although market players are seeing an uptick in mining and civils projects, construction is still dead. Government’s R800bn carrot has many companies trying to wait out the slump, with work on the Medupi power station sustaining many until other large infrastructure projects are rolled out. Until then, heavily discounted construction shares are still easy to come by.
After the Raubex/Sanyati plan of action was announced, the respective shares experienced a short glimpse of a more optimistic market. Then it was back to old habits. Sanyati’s share price dropped 9% to 32c once the excitement began wearing thin. However, Basil Read’s share price is still cruising. No prize for guessing it will be short-lived.