Johannesburg — ON FRIDAY I told you that Jean and I were building a high- dividend yield portfolio as part of our own main portfolio and that we had bought shares in the construction company Stefanutti Stock Holdings (Stefstock). I wrote also that the staring point was a share price of R10,70 with a historic earnings yield of 17,3% and a dividend yield of 5,4%.

I should have added that its historic price :earnings ratio was 5 :8. This ratio is about one third of the historic price :earnings ratio of the JSE all share index which at Friday's close was 16 :31 with an earnings yield of 6,13% and a dividend yield of 2,32%. When a share's market rating is out of kilter with overall market ratings, this strongly suggests that the market believes alarm bells are about ring. The market, we are continually reminded, knows best. This is, of course, codswallop. The market wouldn't have booms and crashes if it was prescient.

Yes, Stefstock's market rating is out of kilter with the market -- all the more reason to assess its investment fundamentals. In particular, will the company be able to maintain -- preferably, improve -- its bottom-line earnings and provide a growing stream of dividend income?

The business environment for the construction sector is a mix of good and bad. It is especially bad for private residential building, and poor for commercial and industrial development, but offers a wide scope of opportunity for infrastructure growth. The latter is the focus of Stefstock's domestic operations and also its target for its geographical diversification.

In Stefstock's report on the half-year ended August 31, published last week, the directors cautioned that the rest of the year is expected to remain challenging. There are funding constraints on projects and tender margins are lower. In the financial year 2011, securing new contracts is expected to be tougher than previously.

On the plus side, Stefstock "is strongly positioned to benefit from infrastructure spend and anticipated growth in the power generation and mining sectors". It also has opportunities in municipal services and in the pipeline, rail construction and renewable energy sectors, and expects to participate in the Gauteng Freeway Improvement project. At the end of the period, its order book amounted to R6,6bn. The company has exceptional proven skills in a number of operational areas and its management investment fundamental is sound.

Using the model for assets managed on Stefstock's in the financial year ended last year, I wrote in March that bottom-line diluted normalised earnings per share should be at least 160c. The actual figure was 173,56c. In the latest half-year its earnings were 104,37c.

This year, my model showed a fall in return on assets managed, partly because of lower expected margins but, more markedly, because of a reduction in asset turn (the ratio of revenue to total assets). The lower asset turn was because of a combination of an almost trebling of contracts in progress -- much of this potential yet to be realised -- and the additional in intangibles related to acquisitions -- again potential to be realised.

I'm reasonably confident that its return on assets managed can be sustained and that bottom-line earnings growth will improve, though at a slower rate. Stefstock seems to promise to be a steady dividend income generator.