Woes of a feast or famine industry

On Wednesday, the day that Murray & Roberts (M&R) announced that it would no longer pursue its bid for construction and engineering group Aveng, the heavily indebted Aveng’s share price remained rooted at 8c a share.

M&R’s decision to walk away from the proposed R1bn transaction was a blow to Aveng’s prospects.

The deal was a glimmer of hope for Aveng which has debts of R3.25bn.

The group has said this debt is unsustainable.

The merger with M&R could have been Aveng’s ticket out of misery. Aveng has said that its share price is undervalued.

Its value could be enhanced by better performance by its underground and surface mining business Moolman’s and McConnell Dowell, the engineering, construction and maintenance contractor, as well as the disposal of Aveng Grinaker-LTA and Aveng Trident Steel.

These days Aveng, the company that built the iconic FNB Stadium, is a shadow of its former self.

It closed 12.5% down at 7c a share on Monday. That is a far cry from the record high of R72.92 in 2008.

To an extent, Aveng’s misfortunes are a reflection of how much the construction sector has lost its shine in the past decade, transforming from one of the key sectors that used to keep SA’s economy running to one that is on its knees.

In SA, the sector is bracing itself for a muted infrastructure and industrial market in the medium term.

Contacted for comment on M&R’s decision, some analysts said on Friday they had stopped following construction stocks because the sector’s future shape and form remain uncertain. Some said the sector was not worth their while as long as the industry’s prospects kept looking dim in a low-growth environment.

Vestact Asset Management portfolio manager Byron Lotter on Friday said the firm did not cover any construction stocks.

“It is too cyclical. It is a feast or famine industry. We prefer to hold stocks for longer periods instead of jumping in and out,” said Lotter.

He said Vestact would not find construction attractive even if the sector recovered immensely. “It would be great for the country if construction recovered but it will not change anything for us,” said Lotter.

The firm’s focus was on technology, health and retail. He said the three sectors offered relative stability.

Warwick Lucas, chief investment officer of Galileo Asset Managers, on Friday said there was deep value in some listed construction stocks.

Lucas said it was not immediately clear what would trigger a rebound for the industry because the recovery off the 2016 lows was shallow and slow.

“One therefore has to take a view to invest despite the lack of decent news out there. The sector is so small now that an institution would have no meaningful chance to get in after any good news.”

The only investable shares left under the construction header are Calgro, Raubex, Stefanutti and WBHO. “Strictly speaking Calgro isn’t actually a construction stock, it’s a developer,” said Lucas.

The performance of the sector also depended on economic growth. With no restoration of stability “and sanity” to economic policy, the listed construction sector could go to zero, said Lucas.

IT WOULD BE GREAT FOR THE COUNTRY IF CONSTRUCTION RECOVERED BUT IT WILL NOT CHANGE ANYTHING FOR US