Construction stocks have come under the spotlight in recent months amid a lull in local activity, despite government's 800 billion plus infrastructure spend pledge. The Competition Commission is also investigating allegations of widespread collusive practices in the construction industry, all making the picture rather bleak.

Grant Cloete, construction analyst at Investec Asset Management, said: "Unfortunately, construction activity in SA appears to have reached a temporary stalemate. Over the medium term, sector growth may be patchy.

"Investors agree that, given the need for social and economic infrastructure, construction companies will definitely play an important role."

Cloete noted that driving the rollout of these infrastructure projects would have to be done by government in conjunction with the private sector.

"The process of finding a workable solution is probably one of the reasons that has led to the current hiatus in major project awards."

The analyst said that, unfortunately, construction companies did not have the luxury of time and many would feel the pinch on the bottom line, with salaries to pay and very little revenue inflow to book it against.

"Indeed these stocks 'appear cheap' looking at their underperformance and relative price-earnings multiples. However, it is difficult to accurately gauge the extent of the hiatus and therefore investors, willing to take a view and a position this early, should place their hard-earned capital with innovative, well-run, financially sound construction companies able to weather the tough environment for just a little while longer," he said.

Company earnings

In February, Wilson Bayly Holmes Ovcon (WBO) posted diluted headline earnings per share of 676.3 cents in the six months to December compared with 836.7 cents previously, along with a 19% drop in profit.

The company said its order book stood at 13.1 billion rand at the beginning of 2011, from 12.3 billion rand.

In March, Aveng announced headline earnings per share of 98.2 cents for the six months to December 2010, from 147.7 cents previously.

Revenue remained stable at 16.892 billion rand, from 16.832 billion rand before, while operating profit declined 25% to 513 million rand, from 684 million rand previously.

An order book of 30.7 billion rand revealed a marginal decrease from 31.1 billion rand at the end of June 2010.

Operating profit before depreciation and amortisation declined by 14% to 1.05 billion rand, the group said.

Aveng added that the business environment for the reporting period remained challenging.

Aveng said its South African construction order book had increasingly become more dependent on private sector projects, which had been relatively stable.

Also in March, Basil Read Holdings reported a 16% rise in revenue to 5.4 billion rand for the year to December 2010.

Diluted headline earnings per share dropped to 209.25c from 332.43 cents a year ago. Operating profit was down 5% to 408.7 million rand from 429.2 million rand in the previous corresponding period.

The group declared a final dividend of 30 cents per share, which, together with the interim dividend, amounted to 72 cents. Its order book stood at 8.5 billion rand.

In May, Stefanutti Stocks highlighted a 16% drop in diluted headline earnings per share to 179.19 cents for the year to February 2011, from 214.31 cents previously.

Revenue was off 7% at 6.99 billion rand, while operating profit before investment income declined 11.7% to 442.3 million rand. Profit for the year declined to 333 million rand from 389.2 million rand before.

At the end of June, Murray & Roberts (MUR) said in a business update that it expected diluted headline earnings per share and earnings per share to show a loss for the financial year to June.

This, it said, was considering the level of exceptional charges and loss on discontinued operations recorded in the half-year and to date.

"Operating profit, diluted headline earnings per share and earnings per share all from continuing operations will be lower by more than 20% relative to the previous comparable period," it said.

The group said its order book remained steady at about 52 billion rand, of which about 19 billion rand related to remaining works on the South African power programme.

In 2010, the group pointed out that an increase in working capital resulted in a higher interest charge, and diluted headline earnings were 50% lower than the previous year at 340 cents per share.

In 2010, revenue declined slightly to 32 billion rand, with operating profit down 36% to 1.8 billion rand at an operating margin of 5.6%.

A final ordinary cash dividend of 53 cents per share was declared.

Current pricing

In Afternoon trade on Wednesday, shares in Murray & Roberts gained 80 cents or 2.68% to 30.60 rand on the JSE. Shares in the group reached a one-year high of 46.23 rand on October 18 2010, with a one-year low of 22.45 rand on February 25. An I-Net Bridge analyst consensus put the group's price/earnings ratio at 19.42 for 2011, and at 8.59 for 2012 from a price/earnings ratio of negative 80.55 over the past 12 months.

Aveng dropped a mere eight cents to 35.81 rand, having posted a one-year high of 45.40 rand on November 3 2010, and a one-year low of 33 rand on July 19 2010.

An I-Net Bridge/BusinessLIVE analyst consensus put the group's price/earnings ratio at 10.60 for 2011, and at 8.52 for 2012 from a price/earnings ratio of 9.07 over the past 12 months.

Basil Read shipped 33 cents or 2.27% to 14.22 rand, having achieved a one-year high of 14.75 rand on July 11, and a one-year low of 9.90 rand on March 15. The group achieved a high of 39.45 rand since February 1986.

An I-Net Bridge/BusinessLIVE analyst consensus put the group's price/earnings ratio at 6.05 for 2011, and at 4.89 for 2012 from a price/earnings ratio of 6.08 over the past 12 months.

Wilson Bayley lost 81 cents to 108.99 rand. The group traded at a one-year high of 144.49 rand on January 19, with a one-year low at 101.55 on July 22 2010. The group's record high since February 1986 stood at 154.80 rand.

An I-Net Bridge analyst consensus put the group's price/earnings ratio at 7.12 for 2011, and at 7.19 for 2012 from a price/earnings ratio of 6.83 over the past 12 months.

Shares in Stefanutti Stocks declined 30 cents or 2.4% to 12.20 rand, having hit a one-year high of 13.11 rand on January 12, and a low of nine rand on July 30 2010. An I-Net Bridge analyst consensus put the group's price/earnings ratio at 6.60 for 2012, from a price/earnings ratio of 6.93 over the past 12 months.

Shares 'underweight'

Francois du Plessis, a director at Vega Asset Management, pointed out that construction companies' order books were stabilising, with Stefanutti recently announcing an increase of 28% since the end of February.

"Uncertainty regarding government's commitment to physical infrastructure delivery seems to be discounted well into current share prices. The Competition Commission's findings are another hurdle the sector faces. We remain underweight, looking to increase exposure," Du Plessis said, favouring WBHO, Stefanutti Stocks and Afrimat (AFT).

A local equities analyst told I-Net Bridge that he wouldn't "touch construction stocks", believing that it would be at least three years before a recovery would be seen for stocks in the sector.

Ebrahim Dhorat, an assurance partner and construction lead at Ernst & Young, said: "It is true that order books and margins are not what they were for the sector, but these companies have good balance sheets, with each of their respective leadership teams recently expounding on strategies to continue the attractiveness of their companies. The effectiveness of implementation and execution of these plans, which encompass revisiting sectors, markets and geographies, will determine their future value.

"Companies in this sector have good foundations and will continue to hold their value in the short term," he said.

Company forecasts

In March, Aveng said it anticipated that the challenging domestic construction market would continue to limit overall revenue growth, although this would be partially mitigated by the diversity of its operations.

Basil Read said that fundamentals in the construction sector had deteriorated significantly since 2009 and were expected to remain challenging in 2011, despite a gradual economic recovery.

"As a sector, operating performances are likely to be affected by high cost increases and greater competition. A sustained recovery in the sector was always expected to lag a recovery in the larger South African economy, given the relatively long lead times associated with planning and executing large projects," the company said.

Murray & Roberts said that the primary factors that had influenced the performance of the group and the potential financial outcome for year to June included ongoing recessionary conditions in the South African and Middle East construction economies, resulting in performance weakness in the group's construction, engineering and materials businesses.

"The outlook for the remainder of this financial year and full-year 2012 is still of concern. However, we believe that we are well-positioned to cope with the situation," WBH Ovcon said.