Construction sector update

23 January, 2007 at 8:53 am | Posted in Companies, Economy | Leave a comment

The Construction and Materials Index has been a sector of the market that has received quite a bit of attention since South Africa was awarded the rights to host the 2010 Soccer World Cup in May 2004. This attention has been justified, owing to South Africa’s shortage in stadia with sufficient capacity to host the largest sporting event on the earth.

Companies such as Murray and Roberts, PPC, and Group 5 will all be beneficiaries in the massive infrastructure spend over the next few years, both directly in the stadia, but also to the supporting systems, such as roads, rail (Gautrain) and upgrading of the airports.

It should come as no surprise then that investors who invested in the C&M Index the day after South Africa was awarded the right to host the World Cup have seen the prices in these shares appreciate by 64% per annum, more than 20% above the ALSI’s excellent price return(42%) over this period! (These returns exclude the effect of dividends). With these shares hitting new highs, many investors are wondering whether the party will continue, or if these shares have priced a perfect run-in to the 2010 event (resulting in disappointing returns)?

The sector’s PE is currently at just over 22 (ALSI 17.45) with dividends yielding only 1.89% (ALSI 2.22%). This level is high, when compared to the overall market, but not at astronomical levels. Companies are facing bottlenecks as raw materials are at a premium (PPC will be importing cement until their newest quarry comes online – squeezing their margins). The construction companies also have their problems, with a lack of skills often hampering the projects.

Despite these problems, order books continue to show record breaking levels, with developers and government in a situation where they NEED building done NOW and are often willing to pay inflated prices to get it done in time.

While at high levels, this sector still has many attractions. One needs to do homework on each of the companies in this sector to fully understand their operations before diving in. Now isn’t a time when you can blindly buy into the sector and expect excellent returns (like one could have done a couple years back).

The Construction and Materials Index closed up 1.04% today at 53335, near its record high of 53668 achieved on Thursday. Aveng was up over 3%, Murray and Roberts was down 0.44% and PPC was up 1.91% for the day.

(Sharenet)
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