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Some asset managers are biting the construction bullet

Shares priced low enough to buy?

Since the beginning of the year a small group of asset managers has made a point of buying up construction stocks Murray & Roberts, Aveng, WBHO, Group Five, Basil Read and Stefanutti Stocks.  

There were only three sales.

Allan Gray, Old Mutual Investment Group and Kagiso acquired shares in Murray & Roberts; Investec increased its stake in Aveng; Allan Gray increased its stake in WBHO to 10.41%, while PSG Asset Management and Coronation increased their stakes in Group Five. PSG also bought more shares in Basil Read, while Regarding Asset Managers and Sanlam Investment Management bought into Stefanutti Stocks.

The size of the transactions have not been disclosed and the question to ask is have shares in local construction companies reached the bottom and is now time to buy?

WBHO is the only one out of the six companies that has more or less maintained its share value over the last five years. It is in fact 0.76% higher than five years ago. In contrast, Aveng has lost 79.32%, Basil Read 70.51% and Murray & Roberts 63.8% over the same period. Stefanutti Stocks has lost 42.62% and Group Five 21.8%.

Over the past six months only Group Five (+1.51%) and Stefanutti Stocks (+1.49%) are in positive territory.

In the last week Murray & Roberts has seen its share price improving on the back of it being awarded a R4.8 billion underground mining contract. On Wednesday the share price jumped by 7% and over the last seven days it increased by 8.75% to R14.30 at the close of market on Friday.

Also on Wednesday Aveng’s share price jumped by 8%, according to Sasfin’s David Shapiro “for no reason at all”. A disappointing trading update the next day led to a 16% drop in share price and it ended the week at R7.30, 10.43% lower than seven days before.

36ONE Asset Management’s Jean Pierre Verster says it is interesting that several asset managers with a value philosophy have increased their stakes in construction companies over the past year. 

He is still sceptical, but acknowledges that the share prices have decreased significantly. “Just remember, for every buyer there has to be a seller,” he says. 

Verster says that 36ONE looks for a gap between the potential performance of a business supported by company and industry fundamentals versus what has been discounted in the share price. If the fundamentals indicate good prospects that are not yet reflected in the share price, there is an investment opportunity.

In the construction industry the opposite was true. A year ago 36ONE considered the outlook for the construction industry to be more negative than share prices were implying and the considerable drop in share prices since has vindicated that view.

He says each company has its own dynamics. WBHO has the “least negative” outlook in 36ONE’s opinion, on the back of its commercial exposure and Australian operations.

Murray & Roberts and Aveng both have big exposures to the oil and gas market in Australia which has been negatively impacted by the drop in the oil price. 36ONE believes that the market’s reaction to Murray & Roberts’ announcement of a R4.8 billion underground mining contract might have been a bit premature. The drop in Aveng’s share price reflects the disappointment with its latest trading statement detailing the impact of the low steel price on its steel interests and that local subsidiary Grinaker LTA is still loss-making.

Basil Read’s high debt levels make the share unappealing, he says. 

Group Five has handled its recent CEO succession well and could see some benefit from listing its Eastern European toll-road concessions business separately in the next two to three years, Verster says.

Rhynhardt Roodt, portfolio manager at Investec’s SA Equity Fund says the February acquisition of Aveng shares was for Investec’s Value funds, where the mandate is to buy shares that are out of favour and offer ‘value’ relative to the market.

“However; in the Investec Equity Fund we do not own any construction shares. Despite the sector performing poorly in recent years, we are not tempted to buy into the sector purely on the basis of underperformance and perceived relative value. In our view, prospects for the sector remain poor and there is downside risk to earnings expectations.”

He says the building materials sector seems to be doing better than the ‘heavy’ construction sector. “This could be because the residential market seems to be showing some positive signs as more people are renovating their homes and house prices have been trending higher.”

‘Heavy’ construction companies like Aveng have been negatively affected by the lack of public infrastructure spend by government. The collapse in commodity prices has also been a headwind for the sector, Roodt says.

“While the long-term outlook could be better than what we’re seeing at the moment, too many risks remain and we are not buyers.”

The consensus forecasts on Moneyweb are as follows:

 

Murray & Roberts Hold
   
Aveng Buy/Hold
   
WBHO Hold
   
Group Five Buy
   
Basil Read Buy
   
Stefanutti Stock No forecast

Shapiro’s comment on construction shares is short, but not very sweet: “We’re not exactly bullish on construction. We don’t like any company that digs holes. Including miners.”

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Well said David – “We’re not exactly bullish on construction. We don’t like any company that digs holes. Including miners.”
These so-called value investors will have to be very patient with their construction shares as they might think that this time the ‘’market is different’’, but the market is ‘’never wrong’’.
South Africa’s massive twin deficits will continue to weaken the exchange rate as foreign investors stopped buying South African assets. Foreign investors lost a lot of money during the last couple of years as the ZAR continued to weaken against all major currencies and they are losing lots of money in currency terms as well.
Investec also told the North Gauteng High Court that beneficial shareholders don’t have any rights………

End of comments.

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