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South Africa: Aveng, M&R Stay Strong
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Business Day (Johannesburg)
COLUMN
25 July 2008
Posted to the web 25 July 2008
Ben Temkin
Johannesburg
AFTER deciding that the Private Investor portfolio had to invest in the construction sector, we ended up with two candidates: Murray & Roberts (M&R) and Aveng.
There was little to choose between them, but, at the time (last August) Aveng's forward ratings were a shade more favourable: my guesstimate for Aveng's forward price:earnings (p:e) ratio was 17,2 and for M&R 23.
Both companies had published glowing trading updates for their financial years already ended. The sector's potential as a whole was strong and market response had been a one-year spurt that had more than doubled the index to a record peak of 80 in July.
When we began building the new portfolio, the sector had cooled off and the correction took the index down to 64. We knew our timing to buy shares in either firm was about right, as the sector had been oversold.
So which one, or why not both? After we bought M&R shares, I wrote: "We had decided we had preferred M&R partly because the company was less cyclically sensitive than Aveng to currency exchange rates and demand from the mining sector for new capacity. The clincher may have been a quick glimpse of the progress being made on the Gautrain project, part of the massive work in progress of M&R."
We didn't know then there was a risk of potholes in roads above the Gautrain tunnel. But there are many risks in the construction business, as a few World Cup 2010 stadium builders have found to their cost.
Had we bought Aveng we would have had to pay about R46 a share. It's now trading at about R58, having peaked at R70 in May. Our capital gain on the notional investment would now be about 22% (after transactional costs) compared with our current paper gain on M&R of 18%.
Against this purely theoretical comparison, Aveng's bottom-line earnings per share growth was 122% in the prior financial year, while M&R's was 77%.
Aveng's latest trading update is an expectation of bottom-line earnings growth of between 40% and 50%, as against 60% to 70% for M&R. Also, both companies have reported on huge new contracts. Even if the residential property crack turns into a crash, Aveng and M&R won't tremble.
This is not necessarily true of all constituents in the sector. Its heavyweight PPC admitted a while back demand for cement for home-buying was slowing and this trend was expected to go on.
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PPC's share price has fallen from R40 last August to R30 now and its historic p:e ratio has halved. This means that the market is discounting a slowdown in earnings growth.
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