South Africa - Building &
Construction
Still Cautious on South Africa
Construction – prefer Group
Five
We assume coverage of South African construction,
maintaining our In-line view. We keep our price
targets unchanged and keep our OW rating on top pick,
Group Five, and EW rating on Murray & Roberts and
Aveng. We retain our in line view for the sector due to
concerns over the near-term outlook for the construction
stocks. We discuss three themes from the industry: 1)
Slower delivery in public investment; 2) Margins
resilience; and 3) International growth prospects.
The sector is trading close to full value. The stocks
have rallied 28% in the last three months, and have
rerated to trade close to full value, in our view. We
believe the discount that the sector is trading on vs its
historical average P/E is justified considering the high
earnings base, tougher operating environment and
potential margin compression.
Group Five is still our preferred stock. The stock
trades at a 20% discount to the larger-cap stocks and
30% discount to its post-2003 restructuring average
forward P/E. While domestic conditions are weakening,
we still believe SA infrastructure investment will drive the
stock. Group Five’s exposure to SA infrastructure and
defensive order book keeps us positive on the stock.
Near-term catalyst. The Medium Term Budget Speech
(MTBS) in October 2009 should provide an indication of
the slow down on public sector investment and SA
government commitment to the current R787 billion
infrastructure investment.
What would make us more bullish on the sector? 1)
Improved delivery on key public sector investment
projects; and 2) signs of a medium-term recovery in
private sector and mining investment.