If you find yourself attracted to shares in the building and construction sector, you had better make sure you have a stomach for volatility. Building and construction stocks are among the most variable on the Johannesburg Stock Exchange.
An analyst at Nedcor Investment Bank explains that performance in the sector is really a function of the macro-economic environment, with growth driven largely by gross domestic fixed investment (GDFI).
In its latest quarterly report on the building and construction sector, Stellenbosch University’s Bureau for Economic Research warns that GDFI forecasts have been adjusted downward against the background of a weaker than expected export programme. The bureau’s latest survey shows business confidence among non-residential building contractors waning noticeably. “We do not anticipate any reversal of the situation … and a turn for the better will in all probability only take place towards the middle of next year,” the report says.
While some might interpret a turn for the better in mid-1999 as an opportunity to buy shares in the sector now, analysts advise exercising caution when purchasing stocks. Says Appleton Asset Manager’s senior fund manager Nick Downing: “The sector has never been that good from a long-term perspective. If you can trade in and out of shares in the sector quite quickly and literally make your money and run there are opportunities. However, short of this ability, be careful. The shares are almost as volatile as the gold price.”
Analysts conceded, however, that some shares stand out as consistently good in terms of compound earnings growth. Among these are LTA, trading at about R28 compared to an annual high of R36 last August and an annual low of R24 in April last year.
Analysts say LTA’s expansion into other African nations and the fact that it can depend on Anglo American-related construction projects bode well for the group. “LTA enjoys a lot of exposure to mining construction, which makes the company less sensitive to the economic cycle and provides a more stable earnings flow compared with groups like Group 5 or Stocks and Stocks,” says one analyst.
Also a solid performer in a volatile sector is Basil Read, which enjoys strong support from its French partner and Concor Construction. Concor has entered the 1998 financial year with orders amounting to 70% of its total budgeted revenue for the year. It has also helped to set up the black-owned Makhosi Construction. A joint venture between Makhosi, Concor and a Johannesburg-based business group is bidding for a large public tender.