Is construction listing party over?
2007-10-01 · Property Infrastructure
Share price performance of newly listed construction and infrastructure-related companies, many on AltX, are mixed.
Construction is one of the hot investment themes, underpinned by solid fundamentals, such as Government's planned capital expenditure of R372bn over the next three to five years.
However, there's also a lot of spin as corporate sponsors and advisers ride the tails of that good story and bring a flood of new, small construction and related companies to the market, a few of which look like they've been cobbled together just for a listing.
Over the past 18 months or so, the share price performance of these new listings has generally been spectacular, especially staging profits for investors lucky enough to obtain shares in what's nearly always private placings of a limited number of shares. The placings have all been oversubscribed, sending prices soaring when companies list and investors chase the price up. But that could be changing.
Look at two recent listings around mid-August: Sea Kay Construction and abe Construction. Sea Kay, listed on the main board, has more than doubled its 100c/share placement price to 215c. But most of that gain was on the first day of trading and its performance has been fairly mooted since then. However, the market has been a bit erratic.
But AltX-listed abe Construction is marginally below its 200c/share placement price. Even on what's recently become the boom time first listing day, the share only climbed as high as 203c.
Then there's Infrasors, a collection of subsidiary companies that make and supply infrastructure products. It listed on AltX at end-July. It's way off its placement price of 550c/share and at last week's 402c/share had lost 17,5% over the past month.
It could be argued that in some cases the placing price had been pitched too high. The counter argument would be that investors are losing their appetite for small cap new listings and are no longer blindly rushing in.
Share price performance of some of the more established construction-related companies that listed last year remains good. Esor is up 123,5% over the past year, Sanyati by 84,5%, WG Wearne 53,3% and Raubex by 62,4% over the six months or so since it listed.
But here's the interesting thing. The consensus view on the Moneyweb site is "sell" for Esor, WG Wearne and Raubex. Earnings multiples higher than 25 times - 35 times in the case of Raubex - must be making investors nervous. If general market volatility continues, they may decide the party is over and cut and run.
Piet Viljoen, chairman of asset manager RE:CM, is cautious about the new construction company listings. His firm has looked at the companies prior to listing and he says two questions need to be asked.
"Why are these owners and private shareholders - who must have been making good money with all the construction activity going on - suddenly prepared to sell part of their company on the market? If the reason is to raise capital for expansion, then there's more competition coming in. With cheap capital, over time, you have to question whether that won't hurt profitability."
Concerning the capital-raising question, earlier this year RE:CM examined new listings and calculated capital raised as a percentage of total market capitalisation based on the placement price. It found for the latest 16 listings up to 30 March this year (a number being construction-related), average capital raised was 27% of placement price market capitalisation.
That seems to suggest raising capital for expansion is not a major motivation for coming to the market. With limited scrip being offered through private placements - often reserved for convenient subscribers, such as private client businesses - supply and demand is distorted. When the bull market was firmly intact that propelled share prices on listing.
Prices could remain firm in a bull market. The danger is if the market pulls back sharply and the initial investors decide to bail. That would leave the second wave of investors who came in soon after listing, often small private investors, carrying the can.
"If you look at the psychology and dynamics behind some of these new listings, I think the odds are stacked against the shares," Viljoen says. - Shaun Harris, Finweek
Construction is one of the hot investment themes, underpinned by solid fundamentals, such as Government's planned capital expenditure of R372bn over the next three to five years.
However, there's also a lot of spin as corporate sponsors and advisers ride the tails of that good story and bring a flood of new, small construction and related companies to the market, a few of which look like they've been cobbled together just for a listing.
Over the past 18 months or so, the share price performance of these new listings has generally been spectacular, especially staging profits for investors lucky enough to obtain shares in what's nearly always private placings of a limited number of shares. The placings have all been oversubscribed, sending prices soaring when companies list and investors chase the price up. But that could be changing.
Look at two recent listings around mid-August: Sea Kay Construction and abe Construction. Sea Kay, listed on the main board, has more than doubled its 100c/share placement price to 215c. But most of that gain was on the first day of trading and its performance has been fairly mooted since then. However, the market has been a bit erratic.
But AltX-listed abe Construction is marginally below its 200c/share placement price. Even on what's recently become the boom time first listing day, the share only climbed as high as 203c.
Then there's Infrasors, a collection of subsidiary companies that make and supply infrastructure products. It listed on AltX at end-July. It's way off its placement price of 550c/share and at last week's 402c/share had lost 17,5% over the past month.
It could be argued that in some cases the placing price had been pitched too high. The counter argument would be that investors are losing their appetite for small cap new listings and are no longer blindly rushing in.
Share price performance of some of the more established construction-related companies that listed last year remains good. Esor is up 123,5% over the past year, Sanyati by 84,5%, WG Wearne 53,3% and Raubex by 62,4% over the six months or so since it listed.
But here's the interesting thing. The consensus view on the Moneyweb site is "sell" for Esor, WG Wearne and Raubex. Earnings multiples higher than 25 times - 35 times in the case of Raubex - must be making investors nervous. If general market volatility continues, they may decide the party is over and cut and run.
Piet Viljoen, chairman of asset manager RE:CM, is cautious about the new construction company listings. His firm has looked at the companies prior to listing and he says two questions need to be asked.
"Why are these owners and private shareholders - who must have been making good money with all the construction activity going on - suddenly prepared to sell part of their company on the market? If the reason is to raise capital for expansion, then there's more competition coming in. With cheap capital, over time, you have to question whether that won't hurt profitability."
Concerning the capital-raising question, earlier this year RE:CM examined new listings and calculated capital raised as a percentage of total market capitalisation based on the placement price. It found for the latest 16 listings up to 30 March this year (a number being construction-related), average capital raised was 27% of placement price market capitalisation.
That seems to suggest raising capital for expansion is not a major motivation for coming to the market. With limited scrip being offered through private placements - often reserved for convenient subscribers, such as private client businesses - supply and demand is distorted. When the bull market was firmly intact that propelled share prices on listing.
Prices could remain firm in a bull market. The danger is if the market pulls back sharply and the initial investors decide to bail. That would leave the second wave of investors who came in soon after listing, often small private investors, carrying the can.
"If you look at the psychology and dynamics behind some of these new listings, I think the odds are stacked against the shares," Viljoen says. - Shaun Harris, Finweek
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