Construction boom to ignite stocks

DESPITE the economic challenges, listed companies in the construction industry have room for growth this year and the next few years driven by massive projects lined up in the country.

This comes as the companies provide a service in a sector that is regarded a hedge against economic volatility. Infrastructure development, commercial, industrial and residential properties provide value for investments in an economy weighed down by inflationary pressures.

In their Zimbabwe 2020 Equity Strategy report, brokerage firm IH Securities, acknowledge the prevailing challenging business environment in a nation that has affected industry performance.

Foreign currency shortages, liquidity constraints and erratic utilities supplies will also be a poser to listed companies like Masimba, Willdale, Lafarge and PPC that are in construction.

But it's not all doom and gloom for them.

“We believe there is still room for the stock prices in this sector to grow as we expect more activity in the next few years.

“Furthermore, brick and mortar also provide a hedge in this volatile environment,” said IH.

With efforts to improve the business environment, the new Government has provided potential infrastructure projects creating impetus for construction related stocks.

However, funding constraints remain one of the biggest challenges that will weigh down the anticipated projects from blossoming.

Big opportunities lie in road rehabilitation works, residential properties as well as industrial properties.

“We anticipate that funding will be impacted by budgetary constraints.

“On the ground we saw a lot more road works as well as housing construction, which has boded well for the sector as institutional investors seeks alternative investments,” said IH.

In its trading update for the quarter to December 31, 2019, Willdale indicated sales volumes were 15 percent lower than same period in the prior year, but the brick-making firm is anticipating good business starting the second quarter which is traditionally when construction industry resumes operations after the rainy season.

The company is targeting to cash in on Government housing projects and opportunities also lie in the reconstruction of the Cyclone Idai-ravaged Chimanimani region.

Cement producer Lafarge is eyeing expansion of cement milling in anticipation of the growth prospects in the construction sector.

“The business sees opportunities in the growth of the construction sector beyond 2020,” said Lafarge in a performance update for its third quarter.

In line with this, management concluded financing arrangement of a US$15 million facility to fund expansion of cement milling capacity and the Dry Mortar Mix (DMX) plant.

According to the 2020 Infrastructure Investment Programme, Government has set aside billions of dollars for transport infrastructure as it has been identified as key to opening the country to more trade, both domestic and regional, as well as enhancing the country's competitiveness.

Development, rehabilitation and upgrading of the country's road, rail and air transport infrastructure earmarked for 2020 and beyond are set to boost construction stocks.

This is in addition to housing development projects, irrigation facilities as well as development, expansion and rehabilitation of infrastructure at state universities and other institutions of higher learning.

However, like any other sector in the economy, inflation and shortages of foreign currency will remain a poser for the sector as these challenges are expected to remain in the current financial year, in the absence of an immediate solution.

The fiscal space also remains tight as Government is confronted by high import and wage bill coupled with food shortages as half the population is said to be in need of aid as a result of depressed agriculture production, according to the World Food Programme.

“There are huge expenditure headwinds ahead, the economy had naturally become highly import dependent notable amongst the imported products has been fuel and more recently power — these two added to a coterie of other imported products will certainly weigh on the already scarce foreign currency,” said stock brokers EFE Securities.

Meanwhile, the construction Lafarge, Masimba, PPC and Willdale have not been left out on the rally on the local bourse.

On a year to date basis, Lafarge has enjoyed a fine run with a 40 percent gain, while Masimba has increased 26 percent since beginning of the year. PPC and Willdale have added 25 percent and 34 percent of value in that order while the bourse's primary indicator, the ZSE All Share Index shows gains of 68 percent on a yearto-date basis.