WE ALL KNOW THE construction industry is the most bombed-out sector on the JSE at the moment, so it is a good place to be looking for cheap stocks. The obvious place to begin is with the smallest players in these unloved areas of the market.
Stef a nutti Stocks – with a market capitalisation of R1bn – meets our criteria. So, j ust how ridiculous have things got? The company is currently preparing re s u l t s fo r th e ye a r e n di n g February 2015. On 9 March, the company provided a tr ading statement notifying the market that headline earnings per share (HEPS) would be between R0.98 and R1.11, an increase of between 55%-75% on the previous year. The s t atement was naturally ra t h e r wel l- r e c e i ve d by th e market – it sent the share price from R4.91/share to R6.30/share with one rapid entry on the order book.
However, there was a bonus. The loss-making power division of Stefanutti Stocks has now met the requirements to be classified as a discontinued operation. This means that last year’s HEPS will have to be restated to reflect continuing operations. This is done to ensure comparability between last year’s earnings (i.e. 2013/ 1 4) and the forthcoming r esult s f or t he f i nancial year 2014/ 15 – upon which the trading statement is based.
In effect, what is happening is that the power division’s earnings will be stripped f rom headline earnings for l ast year and this year. The net effect will see HEPS for 2014/ 15 rising between 55%75% ( R1.28- R1.42/share), based on the restated number for last year of R0.83/share.
After the share price enjoyed the bump following the trading update, i t has si nce sli d f rom R6. 30/ s hare t o R5.78/ s hare. Based on the anticipated reported numbers provided by the trading statement, the company is now trading at a price- to- earnings ratio of between 4 and 4.5 times. So, according to the market at the moment, you can’t buy a burger joint on 4 times earnings, but you can buy a construction company. And t hat ’ s exactly what you should do.