One analyst at a major bank who wishes to be unnamed, has called the bottom of the construction cycle in South Africa and comments that in the rest of Africa – in which most of the companies are active – the sector scarcely slowed at all.
However, news of a criminal investigation into anti-competitive behaviour set the Big Four counters tumbling in January: The FTSE/JSE Africa Construction & Building Materials Index (JCBDM) retreated 2,9%, the most since August 2012, wiping R1,89 billion from the index’s combined market value, according to data compiled by Bloomberg.
Murray & Roberts (MUR) dropped 3,56% to R24,37‚ Aveng (AEG) was down 3,56% to R29,80‚ Group Five (GRF) gave up 3,63% to R30,50‚ WBHO (WBO) lost 5,18% to R146,50 and
Stefanutti Stocks (SSK) was off 6,10% to R10.
This has been getting value managers excited – but not all of them are convinced that construction share prices have fallen to bargain levels.
The pros and cons
In announcements late last year, value managers Allan Gray and Cannon Asset Management managers said they were taking advantage of the fall in construction share prices.
For instance, Cannon recently highlighted in a paper the remarkable fact that retailer Mr Price has almost the same market capitalisation of six of the JSE’s largest construction firms. Is Mr Price worth the same as the JSE’s entire construction sector?
Moneyweb’s Unit Trust Portfolio Tool shows that Cannon has bought Aveng (AEG) and Group Five (GRF) for its clients. Similarly, Allan Gray has built up positions in Aveng and Murray & Roberts.
On the other hand, Piet Viljoen’s RE:CM issued a media release to motivate its reasons for avoiding construction stocks. RE:CM analyst Richard Court reckons construction stocks have not fallen enough to become cheap.
Says Court: “For example, at the height of the construction boom, Murray & Roberts traded on a price to book value multiple of six times. Compare this to its long-term average price-to-book value multiple of 1,5 times, which is where it’s currently lying. This indicates that it’s fairly valued at present and illustrates how far the share price needs to fall from its highs before it becomes cheap.”
David Shapiro, who manages Sasfin’s Value Fund, is similarly negative on construction, questioning whether the much-anticipated construction spend is really there: “A lot of people have put money into construction thinking the sector is cheap, but I think this is premature. There is a Competition Commission investigation into price rigging, and also the fact that to maintain capacity many firms have contracted to do projects at low margins – the effects of which tend to linger quite a while.
“I’m very cautious – I haven’t seen the evidence of a turnaround yet,” says Shapiro.
The construction sector has had highs and lows over the last decade. Here are some highlights:
In the formal employment sector, the construction sector has the highest annual growth rate (11,5%) from 2001 to 2006. For the same period, the mining sector declines at a rate of 6,4% per annum.
(Labour Force Survey, September 2006)
Minister Trevor Manual allocates R8,4 billion for the construction and upgrading of stadiums for the FIFA World Cup in 2010.
The formal economy absorbs over 1,5 million additional workers between 2003 and 2011. The greatest amount of growth occurrs in the construction sector where the number of workers grows by 7%.