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Stefanutti Stocks

| Investment Landscape, Market Forces

Portfolio manager Vanessa van Vuuren discusses Stefanutti Stocks

Stefanutti Stocks is a multinational, multi-disciplinary construction company with four key divisions: building (residential and commercial), structures (bridges/marine/mining concrete structures), RPM (roads and earthworks, pipelines and mining solutions) and MEP (mechanical, electrical, instrumentation and energy). It has R12.7 billion of work in the pipeline, of which approximately 40% is outside of South Africa.

What we like  

Over the past five years the SA construction industry has seen fixed investment slowing significantly, a lack of large infrastructure projects (excluding Eskom), industry over-capacity post the 2010 World Cup and a tough pricing environment, resulting in razor-thin margins and financial losses. At the same time a wide-scale competition commission investigation has led to the prosecution of a number of players for anti-competitive activity.

Stefanutti Stocks has endured a few years of turmoil, with its earnings declining from 2010 to 2014 (see chart below). For the financial year to the end of February 2015, its interim results are finally showing an improvement off a depressed earnings base. At the same time, its order book has shown healthy growth.

While margins remain under pressure locally, management has secured work outside of South Africa at considerably better margins. Fundamentally, the business is in a sound position with a healthy balance sheet and earnings that are poised to recover.

What we don’t like

The cyclical nature of the construction industry requires a margin of safety when investing in these shares. Furthermore, the allegations of collusion and anti-competitive behaviour have cast a shadow in the form of threats of civil claims and further potential fines if additional collusive acts are uncovered. Stefanutti has paid a material fine and has guided the market that they are not guilty of any other collusive acts. But it may take a long time to restore the confidence of clients, investors and the government  (a key supplier of work).

Risks to the investment thesis 

• A protracted risk of civil claims that remains unresolved

• Further weakening in the construction sector cycle and muted government infrastructure investment

• Unexpected contract losses from key clients in the current order book.

The Bottom Line

At its current share price of 660cps, Stefanutti Stocks is trading at 50% of its net asset value of 1 314cps and is valued by the market at a historical trailing price-earnings (PE) multiple of 8 times (depressed earnings). The forward PE ratio is estimated to be 6.5 times and its earnings for the year to February 2015 should show a material recovery off last year’s depressed base. With the bad news in the price, we believe it offers value and is a strong buy.

Stefanutti

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