Killer Trade: Group Five: a con­struc­tive re­cov­ery

Group Five: a con­struc­tive re­cov­ery

Finweek English Edition - - INSIDE - BY MOXIMA GAMA

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.

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