Killer Trade: Group Five: a constructive recovery
Group Five: a constructive recovery
Group Five’s recovery started early in 2013 when it broke out of its long-term bear trend above 3 195c/share and gradually ascended. It has recently completed a 100% retracement from its 2009 prior high at 4 650c/share, recovering all its losses after deprecating to a 2 100c/share low. Construct i on s t ocks have shown strength after anguishing years of either continued downside or consolidation. Therefore, it comes as no surprise that they are eventually recovering, after dropping from immense highs.
After a few disappointing results where Group Five, the country’s fourth-biggest builder, expected growth to slow in 2010 and suffered a 44% plunge in full-year profits in 2011. This triggered a dip in the share price but the com- pany is now making impressive headway.
Between 2011 and 2012, Group Five formed a base after testing a low at 2 100c/share, on the back of positive news that it would be constructing a R5bn solar plant to supply mines. At the time, Government announced that it wanted to accelerate its renewable energy programme to meet a target of producing 10 000 gigawatts/hour by 2013. South
Africa was moving away from an over-reliance on dirty coal power, which supplied more than 90% of the country’s energy needs to much cleaner energy sources such as solar, wind and nuclear. The company’s lobby for this contract fit the bill, as investors looked on. However, the share price consolidated further in August 2012, when Group Five lost its contracts in the Middle East due to cash-strapped clients who were failing to settle debt owed to the company, including impairments from previously discontinued operations in India.
Soon after, Group Five managed to receive a nod of approval from investors when it bought back its 11% stake from its BEE partner Mvelaphanda Group, which was looking to sell off its assets. Its intention was to transfer those shares to a black empowerment trust, representing its staff and the local community, in order to preserve its level of black shareholding − Government requires South African companies to keep a certain level of black shareholders under a programme designed to right the inequalities of the apartheid era.
The group broke out of its long-term bear trend when it reported a 63% climb in first-half headline earnings in 2013, and declared a dividend of 32 c/share. The big-rig fine from the Competition Commission slapped on 15 construction firms totalling R1.46bn did little to Group Five’s new bull trend in June 2013, as it forged ahead. The firms, which included industry leaders Aveng, Murray & Roberts and Wilson Bayly Homes Ovcon, agreed to cooperate with the competition watchdog in exchange for lighter fines.
Group Five’s recent results reinforced my optimism regarding the construction sector as they reported a 40% rise in firsthalf earnings and dividends. It was an indication that the multi-year construction industry slump was now coming to an end.
Group Five has breached the upper slope of its symmetrical triangle after three months of consolidation. It has confirmed a positive breakout above 4 250c/share − prior to its lucrative financial results. However, its overbought daily RSI (relative strength index) is warning of an impending near-term reversal − possibly back to the 4 340c/share support level − presenting another buying opportunity. The shortterm target of this positive breakout is calculated at 5 100c/share. According to the monthly chart, Group Five has the potential to return to its 2008 high at 6 195c/share − eventually completing a 100% retracement from its 2007 all-time high at 7 380c/share in the long term (one to two years).
A reversal below 4 050c/share (signalling a false break through the upper slope of the symmetrical triangle) could see the stock fall to the 3 700c/share support mark. A change in short-term investor confidence would be signalled below that level, and support at 3 225c/share could then be tested.