As the public sector gears up for its infra-structure spending, there will be calls for people to throw themselves into the relevant development stocks. This is good advice, but new investors should understand that investors moved into this sector a couple of years ago and have already made a killing.
Cement manufacturer PPC's share price has rocketed from around R30 in 1998 to a high of R287,50 in December last year. At present it is trading around R240. PPC has not been stingy in paying dividends, an approach that helped it to produce a total return of about 140% between 2001 and 2004.
Another example is construction group Wilson Bayly Holmes-Ovcon (WBHO). In a period when some of its competitors were ailing, investors pushed WBHO's share price from 140c in 1998 to a high of R29,30 in February this year. It is now trading just below R28. The performance of Group Five mirrors that of WBHO.
The residential property market boom partly explains the experiences of these groups over the past few years. Lower interest rates plus an increasing household incomes on an expanded base caused demand for residential property to rocket. Building and building materials suppliers have feasted on new residential blocks in all SA's main cities. A couple of public infrastructure development projects such as Coega and the Eastern Cape Industrial Development Zone kept the fire burning for contractors and materials suppliers.
Smaller building materials suppliers have also had a good time. Ceramic tiles retailer Italtile recorded a 13th consecutive year of growth in earnings last year. Its share price has moved from a low of 485c in 1995 to touch R139 in March this year. "There is still much scope for us to consolidate and improve our position," says Italtile chairman Gianni Ravazzotti.
The renewed public infrastructure expenditure zeal should come as a bonus to some players and it is a welcome relief to those who have not been so lucky over the past few years.
The two largest construction groups in the country - Murray & Roberts and Aveng - have been repositioning themselves into global players that can handle complicated construction and engineering projects. Figures for the year to end June for both groups are not expected to impress, but things are set to change beyond this year.
Aveng suffered big setbacks as a result of the underperforming construction division. The group has since restructured this division, mainly by cutting back its roads operation. Earnings for the year to June are expected to show between 40% and 60% improvement, albeit from a low base.
Murray & Roberts and Aveng feature prominently in the two consortiums bidding for the Gautrain contract, which at the time of writing had still to be awarded.
The R12bn Gautrain work will be a huge boost to the winner, but it will not be the end of the world for the others, as subcontracts will provide sizeable crumbs.
For the Gautrain bidding, Murray & Roberts teamed up with French groups Bouygues Travaux Publics and RATP International, plus two local construction groups, Basil Read and Concor, in a consortium called Bombela.
Aveng subsidiary Grinaker-LTA formed a consortium called Gauliwe, together with Spanish civil contractor Dragados Concesiones, Siemens and Alstom.
