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Defying conventional wisdom

Raubex shows construction can be profitable at the bottom of the cycle.

This article was first published in the latest issue of the Moneyweb Investor. To read the magazine click here.

Raubex recomm

Raubex  table

 

Raubex is one of the few green spots in the beleaguered construction sector. Its balance sheet is solid with a net gearing ratio of 3.2%. It also boasts uninterrupted profitability since its listing in 2007, complemented by an eight-year history of dividend payments. 

Despite this performance, it has seemingly been overlooked by investors. We think this creates a buying opportunity. We believe the group has great potential for future earnings growth that is not being reflected in its share price.

The group delivered a strong set of results for the year to end-February. Revenue growth was largely driven by a strong performance from the materials and infrastructure businesses. Belabela Quarries, which was acquired in March last year, contributed R103.1 million to revenue and half of the 14.2% growth in operating profit. Headline earnings grew 12%, with the difference in operating profit growth and headline earnings growth being due mainly to higher finance costs, which ballooned to R91 million (2015: R62 million).

Raubex share price (rebased)

Raubex  graph

 

We draw comfort from the size and quality of its order book. Management says the three-year order book is at R8.27 billion (2015: R8.68 billion). While this is slightly lower than the previous year, it has good exposure to quality projects. It also reflects an improving geographical spread, although it is being hit by delayed payments from the Road Development Agency in Zambia on one of its biggest international projects. What we have noticed lately is that as a result of aggressive tendering and high operating leverage across the industry, most players, particularly the larger ones, have been less selective on projects. This has resulted in an increase in loss-making or low-margin contracts in the sector. Raubex has, however, leveraged its leading position in roads-related work to negotiate for a good quality order book.

Raubex’s medium- to long-term prospects are exciting as the South African National Roads Agency (Sanral) plans to roll out a number of multibillion-rand projects. Management says Raubex has tendered for the construction of the bridges on the planned 560km N2 Wild Coast toll highway, which will run from the Eastern Cape to the south of Durban. One of the bridges is expected to be 1.2km. Additionally, Raubex is bidding in the R15 billion upgrade project of the N3 highway between Durban and Pietermaritzburg. Long-term prospects are also sweetened by Sanral’s takeover of provincial roads in Limpopo, Eastern Cape and North West, where extensive rehabilitation of roads is planned.

Raubex benefits from a vertically integrated business model. Through strategic acquisitions, it has established a vertically integrated supply chain giving it control of bitumen, aggregates and asphalts used in road construction. It is also the only construction company in the country able to provide the full road construction cycle from earthworks, crushing and asphalt production to the final product. This gives it more control over costs – something that cannot be said for its competitors. It also means it is in a position to capture value along the entire chain.   

Diversification is playing a bigger role in the group’s resilient performance. While it has its roots in roads-related works, over the years it has built a vibrant construction materials business. That business now accounts for more than half of the group’s operating profit.

We valued Raubex using two methodologies: the discounted cash-flow model and the Ebitda (earnings before interest, tax, depreciation and amortisation) exit multiple method. Based on equal weightings for the two methods we arrived at a target price of R22.46 for Raubex shares, which falls into the buy region.

Raubex table 2

 

Bull factors

  • Relatively strong order book in the short to medium term
  • Healthy balance sheet and cash-flow position
  • Improved geographical spread

Bear factors

  • Trading conditions should remain relatively challenging in the short term with competition keeping margins under pressure
  • Risk of civil claims from the collusive conduct in the run-up to the 2010 World Cup remains
  • Overly reliant on government-related expenditure, which constitutes 42% of its order book
  • Political uncertainty surrounding e-tolls compromises Sanral’s ability to raise funding for future projects

Nature of business: Raubex is a construction company with a specific focus on infrastructure development. It operates across SA and in other areas of southern Africa. Its main line of business is road building and road rehabilitation through its subsidiaries Roadmac, Raubex Construction and Raumix.

Disclosures: The analyst has no financial exposure to the instrument discussed. The opinion represents his true view. For Intellidex’s full disclaimer, methodologies and definitions please click here.

 

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