Construction growth to last at least to 2015 in South Africa
As expected, in Finance Minister Trevor Manuel’s budget, an enormous amount of money is to be spent on infrastructure.
As I mentioned yesterday, there’s no shortage of money to help alleviate poverty and develop our economy — the problem is to manage the resources efficiently.
For construction companies — as I cited from Group Five’s results for the half-year ended December 31 — a fundamental investment problem is the difficulties in managing the awarding and implementation of contracts.
In due course, the infrastructural plans in the budget will be implemented and Group Five and other construction companies will benefit from these.
“In due course” is, of course, an elastic period of time. Even so, there is some solid evidence that the construction sector is in a growth phase that could last at least beyond 2015.
In its 2007 financial year-end (June 30) presentation, Group Five showed a chart of the market outlook for the construction sector. The chart was sourced from Stellenbosch University’s Bureau of Economic Research. The figures used were of real (inflation excluded) investment in construction works.
The chart confirms that the sector is in a five-year growth cycle. In 2003, total construction work was valued at about R25bn, which in real terms was below the figure in 1991 when it last enjoyed a growth phase.
In 1981, the peak year of previous state infrastructural growth, total construction work amounted to R40 billion. Only last year was that figure again reached.
Stellenbosch’s bureau forecast takes this figure to more than R65 billion by 2015, of which the public sector is expected to contribute R50 billion.
Five years ago, Group Five’s share price was about R5,30. Its historic price:earnings ratio then was around five, and its share price trend was boringly flat. But as the cycle sector progressively improved, the company’s turnover and profits rose and the share price responded positively.
In the 2003 financial year the company’s headline earnings per share were 120c. Last year they were 283c. The share price is now at about R51,50 — about 10 times the 2003 figure — but the historic price:earnings ratio is more than 17.
Murray and Roberts (M&R), the construction counter we hold in the Private Investor portfolio, is on an historic price:earnings ratio of more than 20. Rather than believing M&R is overpriced, there is good reason to believe that Group Five is underpriced.
My guesstimate of its forward fully diluted headline earnings per share for the financial year ended June 30 this year is about 330c, giving the share a forward price:earnings ratio of about 15,5 — a bit low relative to earnings growth expectation of about 30% 40% over the medium term.
Group Five also looks an interesting buy on the technical indicators. The share price is still in a bear trend, but the price has broken through all its moving averages. It has a count to R58, a less probable count to R63 and its resistance is around R52.
