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BROKER WATCH
Broker Watch: Stock buys in the construction sector
Jill Fraser - April 21, 2008
 Stocks: Leighton Holdings (LEI), United Group (UGL), WorleyParsons Ltd (WOR) & Transfield Services (TSE)
Construction tumbled last month for the first time in seven months as housing and commercial building fell victim to consecutive interest rate hikes.
But analysts are confident that strong growth across the overall sector (residential, commercial and infrastructure/non-building) will present opportunities for savvy investors.
Construction is worth about $158 billion this year and has been growing at around 5.8% per annum for the last five years. While residential is clearly the least attractive area, exacerbated by high interest rates and government restraints on the release of cheap land, Intersuisse research , Peter Russell maintains that the two subsequent sectors will remain “good news stories”.
Strength is in the commercial side, which has been growing at about 6.7% per annum and infrastructure/non-building (roads and bridge building and non-building including pipes, dams, refineries, mines, railways, telecommunication ducts), which has been exhibiting very strong growth of 12-13% per annum.
Russell notes that there has been “massive underinvestment” in motorways, railways and infrastructure due to the reluctance of Government to increase taxes to fund the correction of existing bottlenecks and faults. He states that the situation has become critical and needs to be resolved, which makes this a “strong growth area” and “very attractive for investors”.
|
COMPANY |
ASX CODE |
ANALYST RECOMMENDATION |
SHARE PRICE |
|
Leighton Holdings |
LEI |
Positive outlook – IBISWorld (David Massage) ACCUMULATE – Intersuisse (Peter Russell) |
$43.10 |
|
United Group |
UGL |
BUY – Intersuisse (Peter Russell) |
$12.33 |
|
WorleyParsons Ltd |
WOR |
Positive outlook – IBISWorld (David Massage) |
$35.84 |
|
Transfield Services |
TSE |
BUY- Intersuisse (Peter Russell) |
$12.08 |
Leighton Holdings (LEI) Positive outlook – IBISWorld; ACCUMULATE - Intersuisse
Shares in Leighton Holdings, Australia’s largest construction, engineering and contract mining company, surged last month following a tip off that a $700 million alliance with Accor (Europe's biggest hotel owner) could lead to a string of hotels across India and China.?
The report remains unconfirmed but regardless the company looks set to meet its expected 20% rise in profit for fiscal 2008.
Its principle activities include contract and project management and property development in Australia, the Gulf region, Hong Kong and SE Asia. In the first half of 2008 it delivered a 32% increase in operating profit after tax to $250 million.
During this period it secured $12 billion worth of new work. The highlights were the acquisition of a 45% stake in Al Habtoor Engineering - a leading construction contractor in the Gulf region – and a long-term joint venture agreement with Abu Dhabi’s Tourism Development and Investment Company, which will lead to US$60 billion worth of projects in the United Arab Emirates over the next decade.
In January the Leighton Group clinched a $394.5 million contract in the United Arab Emirates through its joint venture with Al Habtoor Engineering to construct a hotel, residential and commercial complex in Abu Dhabi and early this month, Leighton, a subsidiary of Germany's Hochtief AG, won a $1 billion order to develop and operate a greenfield open-cut coal mine in India. “Although their shares are expensive they have a good cash position,” says Intersuisse’s Peter Russell.
United Group (UGL) BUY – Intersuisse
Shares in engineering, rail car manufacturing, property management and outsourcing firm, United Group fell following a below par first half profit result, despite a rise in profit of 45%.
“It had a disappointing last half and the price dropped considerably in the past three months….that made it somewhat cheaper so it has quite a good yield and price earnings ratio,” says Russell.
“It has a strong record of growth and has a lot of prospects. It has made investments in the US and Singapore in property management groups. It also promises to benefit from the mining sector,” notes Russell.
United Group says that the three main drivers of its growth - increased infrastructure spending in Australia and Asia, a buoyant resources sector and a growing global property services business - all remain strong.
Intersuisse reports that the firm’s management has “lowered the earnings risk profile through diversification and building the proportion of long-term and recurring maintenance style work”.
“The company is well managed financially with strong cash flow and moderate gearing levels,” says Russell.
WorleyParsons (WOR) Positive outlook – IBISWorld
Australia’s biggest engineering company, WorleyParsons delivered a powerful first half result for 2008. Net profit figures hiked by 61.6% to $152.7 million for the six months to Dec 07.
A leading provider of engineering services for the resources and energy sectors, WorleyParsons forecasts an equally strong second half.
IBISWorld’s David Massage says the company has a good reputation, strong cash flow streams, limited capital expenditure requirements, low gearing and is well managed.
“They’re involved in an industry (road and bridge construction) that we believe is looking pretty bullish,” he says.
Earnings before interest tax depreciation and amortization margins increased to 11% from 9.7% - driven by the acquisition of the high margin (Canadian design and project services) Colt Companies, which has significant upstream and downstream hydrocarbons capabilities.
The outlook for WorleyParson’s world-class hydrocarbon division, which has contracts with oil giants Woodside Petroleum Ltd, Chevron and ExxonMobil, is looking upbeat.
Massage expects further improvement in the second half of 2008 – driven by a full six months contribution from the Colt business.
Transfield Services (TSE) BUY– Intersuisse
Industrial services firm, Transfield Services’ shares soared off the back of a 35% rise in first-half profit.
The record result was higher than forecast and the company is confident of a stronger second half.
The project management services and maintenance group’s Australian operations look strong with an increasing demand for asset management services for essential infrastructure, supported by increased government spending.
Its New Zealand business delivered an 18.5% increase in revenue to $194.8 million as a result of its market leadership in the power and telecommunications sectors and a strengthened market position in the roads asset management sector.
In the US, Transfield Services provides essential services and sustainable infrastructure development and asset management services, which Managing Director and Chief Executive Officer, Mr Peter Watson, says insulates the company against the impact of a potential economic downturn. Revenue from the Gulf Region, India and Asia increased by 55.4% to $30.3 million and in January the group entered the South American market with the acquisition of 50% of mining services companies Instrumentacion Y Servicios S.A.
“Transfield has acquired valuable operations in North America, which are heavily exposed to the growth of oil sands in Canada and strong growth in hydrocarbons and infrastructure developments,” says Intersuisse’s Peter Russell, who just recently switched his recommendation from “Accumulate” to “Buy”.
More articles from this edition of CompareShares:
Derivatives: How to insure your investment portfolio before it's too late
Stocks: Broker Watch - stock buys in the construction sector
Investing: Recovering from a bear hug
Stocks: Stock of the week - Sally Malay
Technical Analysis: Using technical analysis to predict gold and silver prices
CFDs: Top ten CFD stocks for the week
Markets: US stocks surge as Google reaps profits
Wealth: Moscow too rich for Forbes' top 100 list
Resources: Resources boom to get second wind
Budget: Inflation tipped to hit 17-year high
Jill Fraser has 25 years' experience in the media as a radio producer on 2UE and journalist for News Ltd, Australian Consolidated Press and Key Media.
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