Construction remains a tough sector where to invest for well known reasons : cyclicity, low margins, risks of cost blowout, lack of recurring business, difficulty to understand the accounts...
But, I feel that most of these risks are already well discounted in the valuation of this sector.
A large number of listed construction companies have also a large net cash position, which limits their risk.
What may be more interesting in the short term is the positive changes in the sector :
- a lot of companies have recently announced major contracts,
- as indicated by Mirvac this week, construction companies are now more selective in picking new orders, which is probably a good sign on margins.
The most recent updates we got from construction companies show that it is probably the case.
The construction sector situation seems to have improved thanks to a better supply/demand situation, with still a high level of demand, while a lot of contractors/sub-contractors have gone bankrupt*.
New orders are coming from a lot of difference sources : infrastructure, electrification, data centers, defence..
Not easy to do stock picking in this sector.
2 areas recently where we saw significant new orders : electrification and tank construction.
The stocks linked to electrification are quite well known : SXE, SKS, MYG, GNP, KOV...
Tank construction stocks (micro caps) are less well known : Saunders International (SND) and EVZ. Both stocks look cheap with an EV/EBITDA of around 3 x, while they generate a high level of free cash flow looking at their last figures (which may have been boosted by large one off).
One of the problem with SND and EVZ is their real poor liquidity.
* + 28 % for construction industry insolvencies for FY 24 (source : ASIC in AFR)
Expand
