M&R opts for share buyback
Market fails to react as construction contractor says it will spend equivalent of 4.3% of its market capitalisation
With Murray and Roberts (M&R) shares trapped at levels where they traded 15 years ago, Friday’s news that it is to spend R250m buying back shares should come as a surprise to few.
But the decision by the company to spend the equivalent of 4.3% of its market capitalisation of R5.87bn did little to rouse excitement.
The stock hit a peak of R104 on August 31 2008. It closed at R13.07 on Friday, down 2%.
Even so, some of the country’s biggest fund managers — the Public Investment Corporation (PIC), Allan Gray and Coronation Fund Managers — have taken big positions in M&R and other construction and engineering companies in SA despite razor-thin margins, the regulatory backlash against their World Cup collusion and the evaporation of public sector spending.
M&R, which has now exited the heavy construction business in favour of work in the gas and resources sector, says its share price "continues to undervalue" its prospects. The company is adamant that the 2018 financial year will "be the start of a new earnings growth period" — a view that it says is supported by third party research.
CEO Henry Laas says the company is on the short list for "several" sizeable projects in the metals and minerals sector and expects investment in new capacity in the liquefied natural gas market to pick up within the next year.
Of the local asset managers, Allan Gray appears to have the most conviction in the prospects of a rebound.
Portfolio manager Simon Raubenheimer says "construction is probably the most hated sector on the JSE at the moment," but its clients are "substantial shareholders". The reason? "We think the shares are cheap. The shares all trade at substantial discounts to the value of their net assets even after adjusting for potentially unrecoverable claims and unsuccessful dispute resolutions.
"A successful resolution of any of the uncertified claims provides substantial upside optionality — in some cases bigger than the market capitalisation of the firms concerned."
The risk is that disputes drag on, but Raubenheimer says "that is effectively what the market currently believes and what is priced into the shares".
Allan Gray’s biggest construction holding is a 27% stake in Group Five.
Coronation, too, has now built up a substantial holding in Aveng, to over 21%. But Coronation chief investment officer Karl Leinberger makes the point that while the position is big, Aveng’s market cap and those of most of the JSE’s former construction darlings is now so small that as a percentage of Coronation’s assets under management, the stakes are tiny.
Construction holdings represent about 0.3% of Coronation’s total portfolio and the asset manager is not optimistic about the sector’s prospects, although it does feel that certain stocks, like Aveng and Group Five, are "ridiculously cheap".
Allan Gray is less pessimistic. "Yes it would seem the short-to medium-term prospects are not fantastic. But if the outcome is a bit better than the pessimistic consensus, the upside is material," says Raubenheimer.
The risk for fund managers like Allan Gray and the PIC is that a turnaround in the construction industry fails to materialise and they remain stuck with stock that no one wants to buy. But Raubenheimer says "when the cycle turns, liquidity will return".