Are things look­ing up for Mur­ray & Roberts?

Finweek English Edition - - KILLER TRADE - BY MOXIMA GAMA

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.

POS­SI­BLE SCE­NARIO:

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.

AL­TER­NA­TIVE SCE­NARIO:

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