Are things looking up for Murray & Roberts?
The idea of investing in any construction stock at this stage may seem reckless, as the fundamentals of the industry a re st i l l l ooking dire. The JSE’s Construction and Materials Index is down 46% over the past year, and the country’s major construction companies continue to struggle due to low demand. Many also faced hefty f ines related to tender-rigging and price-fixing following i nvestigations by t he competition authorities.
Aveng, the biggest group based on revenue, warned in August that further restructuring may be required – it cut 6 000 jobs last year – unless it secures more contracts before year-end. Basil Read, which also had to restructure operations after reporting a loss of R821m in the 2014 f inancial year, reported improved earnings for the six months to end June, but said it is consulting a private lender to provide working capital.
For Murray & Roberts ( M& R), the story hasn’t been much different. It reported a decline in revenue and earnings for the year to end June, and warned that the 2016 financial year will be even more challenging as the expected growth in underground mining will not be sufficient to offset the expected decline in the contribution from its oil and gas business.
“The declining order book over the past t wo years ref lects the reality of a subdued global economy and weak demand for commodities, coupled with low investment in fixed capital formation in South Africa,” M&R said.
Due to t he l ack l ustre demand locally, the group is transforming from being predominantly a South African engineering and construction company to an international group focused on the natural resources market sectors. The group operates four segments: Infrastructure & Building, Energy & Industrial, Underground Mining, and Oil & Gas. The group operates in Southern, Central, and Western Africa; the Middle East; Southeast Asia; Australasia; a nd North a nd South America. Despite t he c ompany ’ s wea k e r performance, CEO Henry Laas tried to assure investors that the group did well to maintain earnings broadly in line with the previous financial year – it also maintained its dividend – and that M&R continues to adjust its cost structures according to market requirements.
Though M&R’s share price is down 41.6% since the start of 2015, it is likely to retain key support that will possibly trigger a reversal, given its extremely undervalued nature (according to its monthly relative strength index, or RSI).
A bullish base could be in the making between R15/share and R11.70/share. Upside above R15/share would kick-start the ascending phase towards the R22/share resistance level of a potential bottomingup pattern in six to 12 months.
With the RSI trading in a symmetrical triangle, trade may be volatile in the near term. But if the lower slope of the RSI triangle holds, with support retained at R11.70/share – a positive breakout above R15/share would be imminent. Investors could nibble at R15/share and increase long positions at every resistance level breakout thereafter. Also keep an eye on the price of Brent crude oil, which is set to recover from its lowest levels.
Refrain from going long if the R11.70/share key support level is breached, as downside to the R9.40/share or even R6.05/share prior lows could ensue.