Research Notes
Construction industry barometer: still under post-crisis pressure
| 01.06.10 |
We continue to highlight on a regular basis the latest financial results from infrastructure companies in our ‘Construction Industry Barometer’. The results for 4Q2009 and 1Q2010 have revealed the lingering weakness of the construction sector on limited state financing for infrastructure projects. However, some companies in the sector have been doing well, despite the overall weakness, and their shares open up interesting investment opportunities.
Construction sector only now begins to show first signs of recovery... In April, the Volume of Construction Work Index, published on a monthly basis by the Federal Statistics Service, exceeded 100%, showing an increase in the volume of construction work y-o-y for the first time since late 2008. In our opinion this is a sign of a gradual recovery in the Russian construction sector. We also note that the index has been steadily on the rise from the beginning of 2010.
... but stays under pressure from limited financing for infrastructure projects. The actual 1Q2010 results from the 12 companies covered reveal the lingering weakness of the construction sector; only half the issuers closed the January-March period with positive bottom line, and just a quarter of the companies showed revenue growth y-o-y. Most companies’ management continue to point to a lack of government financing for infrastructure projects and stiffening competition for state contracts, which eats into profit margins.
MSTT and LEGS reported better 1Q2010 results than others. Among the infrastructure companies with positive 1Q2010 results, we single out MSTT and LEGS. MSTS, VLGM and GMST also preformed fairly well, while TRSS and ISKC have had disappointing financials.
MSTT remains our favorite. As before, we regard MSTT as the best investment opportunity in the construction sector on a risk-return ratio. We underscore numerous powerful upside drivers for the company, putting special emphasis on the continuing consolidation in the road-building sector, the forthcoming release of IFRS financials by the company and its preparations for an IPO.
We also turn investor attention to ISKC and MSTS. We primarily link the weak financials from ISKC for the last two quarters to a seasonal fall in demand. Meanwhile, the market values the company at least 3x lower than its capacity replacement value, while a new plant, scheduled to go on stream in 2011, should allow the company to boost its production capacity by 70%. Strong financial results, a healthy order book and a relatively low market ratios make MSTS shares an attractive opportunity for long-term investors. With its blocking stake in the hands of MSTT, the company may count on a more active involvement in Sochi 2014 Olympic projects and growing interest on the part of investors ahead of an IPO by MSTT.
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Sector: ConstructionCompanies: Bamtonnelstroy, OJSC Mostotrest