August 2013
CONSTRUCTION WORLD
10
marketplace
Value in the construction sector
The deterioration in the fundamentals of the construction industry,
following the downturn in the sector post the World Cup stadia
spend and infrastructure boom leading up to the event, has resulted
in pockets of cheap investment opportunities starting to appear.
RICHARD COURT, ANALYST
at RE:CM,
a value based asset manager, says RE:CM’s
focus on the construction industry has been
primarily from a local perspective.
“The operating economics are essentially
the same for construction companies world-
wide. There are very few barriers to entry, as
shown by South African contractors sourcing
work from places like Australia to Dubai.
Ingeneral, the construction industry is not an
industry that RE:CM considers a good place
to find quality businesses as measured by
competitive advantages. However, this does
not mean that these industries do not offer
up bargains. RE:CM has the luxury of focus-
ing on high quality businesses in our global
investable opportunity set which would
exclude most construction companies.”
Court says that an in-
vestor in a construc-
capital to this investment idea.” He says it is
interesting to note that WBHO is trading at a
premium to its long term median EV/Sales
multiple of 0.3 times.“WBHOhas not dabbled
to the same extent in non-core assets, such
as constructionmaterials, like its competitors
have, and its management has earned the
respect of the industry in terms of their ability
to price and execute on a contract.”
Court says that WBHO’s track record is
appreciated bymarket participants.“WBHO’s
Returns on Equity are superior over time in
comparison to their listedpeers.The investing
public seems to be aware of this, hence why
WBHO is trading above its long termmedian
EV/Sales. While we appreciate WBHO’s man-
agement, we simply are not interested inbuy-
ing or owning WBHO shares at these levels.”
Court says that the challenges remain the
same for the construction industry.“Competi-
tion for construction contracts in SouthAfrica
is still fierce, which translates into lower prices
being accepted for contracts and implies that
the construction companies are not being
remunerated for the operational risk that
they are incurring.
“However, the lack of barriers to entry for
construction companies does have a silver lin-
ing. It is possible for a construction company
to move from one construction discipline to
another discipline which is showing greater
demand for construction services. This is the
case whether the new market is offshore
or in a different market, such as the oil and
gas or renewable energy sectors. This allows
construction companies to change and follow
the demand for their services.”
He says that the collusion charges within
the industry do not change their view on
the economics of the industry. “In terms of
valuation, RE:CM does its utmost to include
the financial impact of these charges into
our valuations. Additionally, RE:CM allocates
capital to businesses at a price that builds
in a margin of safety – in other words, well
below what we believe the stocks are worth.
This protects us against permanent losses of
capital,”concludes Court.
●
About RE:CM
RE:CM is amedium-sized, independent
asset management company that
follows a bottom-up value approach
based on thorough, fundamental
research. The company, with assets
undermanagementofoverR18-billion,
believes a strategy of buying securi-
ties only when market prices are
significantly below intrinsic value will
produce superior results in the long
run – protecting capital when prices
and risks are high, and growing capital
when prices, and thus risks, are low.
tion company is essentially purchasing the
construction contracts that the business
attains, combinedwithmanagement’s ability
toprice for the inherent risk in these contracts
and execute on these contracts in order to
generate profits for shareholders.
“A ratio of Enterprise Value to Sales (EV/
Sales) is therefore a relevant ratio to consider
when evaluating construction companies.
Enterprise Value is the value of the entire
business, being the equity outstanding as
well as any net debt (debt less excess cash).
The EV/Sales multiple represents how much
the market is willing to pay the business for
current capacity to generate revenue and
that particular management team’s ability to
convert that revenue into profits.”
He explains that a comparison of the
construction companies current EV/Sales
multiple assigned to it by the market with
the long term median multiple is a
good indicator of which companies
might be offering value.
He says that RE:CMhas recent-
ly allocated some of its client’s
capital to two other construction
companies – Aveng and Raubex,
but for different reasons.“Aveng
was trading on a far lower EV/
Sales multiple compared to
its median, which drew our
attention to the business.
Closer inspection of Aveng
highlighted a significant manu-
facturing element relative to its
multi-disciplinary construction
competitors, which means that
EV/Sales is less relevant when con-
sidering Aveng in our estimation.
The shares still however offer value,
which is why we have some exposure
to this business.
“Raubex is a more specialised con-
struction company which focuses
on road construction. Again,
our estimation of the
intrinsic value of the
business showed
that it was trad-
ing at a discount
in the market,
a n d a g a i n
RE:CM took
the opportu-
nity to allo-
cate client’s
