Construction shored up by prospects of RDP delivery
Analysts say strong domestic fixed investment this year bodes well for building, writes ZILLA EFRAT
Rising optimism has pushed the sector's index up 11% since the beginning of 1997. The main movers have been cement stocks PPC and Alpha, but companies like Group 5, LTA, Stocks & Stocks and Wilson Bayly Holmes-Ovcon have also made good gains.
This follows a bleak 1996 when, according to Investec Securities analyst Caroline Pugh, shares sensitive to gross domestic fixed investment (GDFI) were hammered by concerns over high interest rates and delays in getting the RDP going.
While no fireworks are expected, the sector's fortunes in 1997 look far more rosy and should be boosted by factors like a rise in road developments, the building of casinos and tourist facilities, government outsourcing and privatisation.
Building and construction companies are expected to turn in solid results this year. But analysts say a strong uptick in activity is expected only from the middle of the year, the effects of which will filter through to the bottom line in 1998.
Projections for the sector are coloured by forecasts for GDFI growth this year. These differ widely - between 3% and 10%. So do expectations of RDP spending. Pugh claims spending has already started and says economists expect 1997 to be "the year for RDP delivery", despite high interest rates.
Standard Bank analyst Anthony Clark is more cautious. He does not expect a fast roll-out of the RDP but says there is great commitment and certain provinces - especially the Northern Province - seem to have their act together.
However, an analyst who does not wish to be named says he is not really convinced that RDP delivery will take place. "Many departments are ready to move with their projects, but they may find that they run out of funds as government imposes constraints in order to keep its spending to 4% of the deficit."
Still another analyst says: "RDP spending is a non-issue. We will not see much happen. The local authorities and municipalities are in disarray. The private sector will increasingly get concessions to run things and government will fall out of the GDFI picture."
The delivery of low-cost housing does not appear to be crucial to the larger construction companies. An analyst says: "It is not a great profit generator. The barriers to entry are low and so are the margins. But the large companies will become involved as a social contribution if they do not have to take on too much risk."
RDP spending aside, analysts say private spending on construction is "trundling" along nicely and construction companies appear to have enough to keep them busy for now.
Cement shares are usually the first to rise when building and construction prospects improve. An analyst says: "They can sell their products and bank the money right away. Construction companies, however, are paid as the job progresses or when it is finished."
Analysts also appear to be divided in their forecasts on cement sales and how the recent disbanding of the cement cartel will affect the main players.
Nonetheless, after hitting annual lows in December, both Alpha and PPC's share prices have made rapid gains this month.
Alpha, at R84 this week, has risen 9,8% while PPC has gained 6% to R67.
Meanwhile, Wilson Bayly Holmes-Ovcon has been a star performer. It has jumped by 53% to 365c since the start of the year and Basil Read has recovered from a low of 120c in May to 200c. Group 5 was trading at 925c this week - a 7,5% rise this year. LTA has improved by 9% to R25,20 and Stocks & Stocks's price of 445c is up 7,3% since January 1.