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 MARKET REPORTS |
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Analyst report - stocks
Construction: a two-speed industry
October 15, 2007
Brendon Lau, ShareAnalysis
US homebuilding stocks have bounced over the past week as investors speculate that longer term value is starting to emerge after the sharp sell-off in the sector. If you are wondering whether the same can be said for Australian building material stocks, the short answer is "no".
Since the start of the US sub-prime crisis, the Basket of Homebuilders Index (HBS) in the US has plummeted 40%. However, over the past week, HBS has jumped close to 10% after some analysts argued that the bad news had been more than priced in. Furthermore, homebuilding stocks tend to rally well in advance of a recovery in the housing sector, which is expected to be late FY09 at the earliest. The flow-on effect will be positive for Boral (BLD) and James Hardie's (JHX) sales volumes due to their exposure to the US residential market.
Unfortunately, these building material companies may not bounce with the same amount of enthusiasm. While US homebuilders have lost 40% in value since late July, the upside for BLD and JHX may be more limited, as they have dropped "mere" 11.5% and 13.5%, respectively.
Moreover, the US economy is still facing a possible slowdown despite the strong jobs report released on Friday. The gold and currency markets are betting that the US economy is not adding enough jobs to prevent the unemployment rate from creeping up over the coming months. The recent weakening in the US dollar is expected to hurt the bottom lines of BLD and JHX.
The Australian housing sector is not offering much support either, and the main problem is housing affordability. The latest August building approvals came in weaker than expected and highlighted further concerns about the sector. The federal government has discussed measures to address the affordability issue. If a resolution is reached, stocks leveraged to our residential market would benefit. This includes GWA International (GWT) and Hills Industries (HIL). Irrespective of who wins the upcoming elections, a solution is likely to be years away.
Fortunately, continued strength in the non-residential market segments in both Australia and the US is offsetting lower volumes in the housing sectors. This reflects the continued growth of companies involved in, and exposed to, the resources sector. This strength is expected to continue into 2008.
From that perspective, we feel the macro picture for the construction & engineering sub-sector remains bright, as it is primarily leveraged to infrastructure and mining construction activities. The strong pipeline of non-residential and engineering-related work that is there for the taking is testament to this. There also seems to be opportunities for growth for the industry via mergers and acquisitions as developments in Leighton Holdings (LEI), United Group (UGL) and Bradken (BKN) have shown.
However, it is not plain sailing for all in this sub-sector. Equipment rental companies face a number of challenges. In particular, bottlenecks and supply-side trends along Australia's east coast impacted organic growth for Emeco Holdings (EHL) and Boom Logistics (BOL). While these constraints are expected to persist over the medium term, outlook statements point to improved showings in FY08.
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
More articles from this week's CompareShares newsletter:
Companies: Exclusive interview with the Pratt dynasty
Stocks: Stock picks for the long haul: Reece Australia and ARB Corporation
Politics: Who are the better economic managers?
Commodities: Wheat prices soar
Technical analysis: Elliott Wave theory spells doom and gloom for the US market
Stock of the week: Imdex Limited
Resident trader: How to profit from volatility
Smart investing: Counting the cost when confidence is lost
Economics: Australian employment data signals rate hike
Stocks: Construction: a two-speed industry
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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