PPC – donning a contrarian hat
Wi t h i n f r a s t r uc t u r e spending under pressure, the construction industry and its related sectors – such as steel and cement – have been under pressure. Private sector spending on infrastructure, for example, halved last year to R95.4bn. In addition, construction companies have been hit by fines for collusion and pricef i xing on tenders, notably related to World Cup stadiums.
Profitability has plunged for most major South African construction groups, and stock prices for the main JSE-listed construction companies have plummeted between 42% and 72% in the past year. Most construction companies have felt massive pressure f rom a decline in mining investment and the almost “non-existent” roll-out of large state infrastructure projects in South Africa, while they are also facing labour disruptions and problems with legacy contracts.
On the plus side, draft regulations that aim to overcome problems related to non-payment of contractors and subcontractors in the building and civil engineering industries were published earlier this month. Similar payment regulations have been introduced in the UK, Singapore, Hong Kong, New Zealand, Australia and most recently Malaysia, and are said to have made a positive impact.
With the construction industry in the doldrums, it’s inevitable that suppliers to the sector will suffer the same fate. PPC, which has been hurt by its own boardroom squabbles last year leading to the high-profile departure of former CEO Ketso Gordhan, has plunged to levels last tested in 2004.
Despite PPC’s efforts to diversify, expand and acquire businesses i n Zimbabwe and Botswana, investors are less than convinced. A proposed merger with AfriSam, which would have seen the combined group control about 60% of the local cement market, was called off in March.
But look at it this way: construction in SA has suffered a big blow and the companies have paid dearly in terms of share value. How far can these shares still fall? Wearing my contrarian hat, to me, current levels make good buying levels – a call that’s purely based on the fact that PPC, in particular, could be bottoming up.
PPC has broken out of its steeper bear trend (within its major bear trend) and ended the consolidation phase of a potential bottoming-up pattern. Support retained at 1 760c/share would i ncrease t he chances of t he group embarking on the ascending phase of the bullish reversal pattern towards the 2 840c/share prior high in the short term (one to six months). However, stop losses should be carefully monitored with this call. A 100% retracement to the 3 475c/share level would even be possible above 2 840c/share.
A reversal below 1 620c/share could trigger another sell-off to the 1 215c/ share support mark – PPC would then test its 2003 lows.