Best of times for construction industry

The shares of SA's leading construction companies look set for further growth in the new year amid the rising momentum of infrastructure expenditure, a construction analyst said last week.

Murray & Roberts' share price increased 93%, Group Five's 88%, Aveng's 79% and WBHO's 65%, said Feroz Basa, equity analyst at Old Mutual Asset Managers on Friday.

"The irony is that many analysts, including me, thought that these shares were already fully valued at the beginning of the year, yet we have seen these steep price rises anyway and they look like they are going higher, mostly on sheer hype.

"Normally construction shares trade at a discount to the FTSE/JSE industrial index because of the risk associated with their large projects, but currently they are trading at premiums of between 20% and 30%, illustrating how high the prices are," he said.

Basa said the next two years were likely to be "a real crunch time" for the local construction industry as more major contracts were awarded ahead of 2010. He said, given the 2010 Fifa Soccer World Cup and Eskom and Transnet's infrastructure projects, "construction companies have all the work they can handle".

Imara SP Reid analyst Stephen Meintjies said construction companies were poised to continue to experience growth in revenue because of the conducive business conditions. "These companies have had price:earnings ratios that we have not seen in a long time, mainly because of previous neglect of infrastructure. Now we are seeing a big catch-up programme. We have had both rising volumes and margins," Meintjies said.

Basil Read said this month that it expected its earnings and earnings a share for the year ended December 31 to be 65%- 85% higher, compared with the corresponding period last year. In the six months ended June, Basil Read's order book was R2bn, up from R865m in the previous period.

Murray & Roberts, another construction company, also issued a trading statement last month, saying it expected headline earnings for the six months to increase 60%-80% compared with the previous corresponding period. The company said it expected revenue to increase 40%-60% for the full year.