Sell call on Group Five

24-10-2014
Read : 99 times
Moneyweb
Source

An opposing view from University of Johannesburg wins the CFA Research Challenge.

Taking a contrarian view, and making a sell recommendation on construction company Group Five, the University of Johannesburg (UJ) won this year’s local CFA Institute Research Challenge, breaking the winning streak of the University of Cape Town.

“Group Five is stuck in South Africa, with low exposure to high growth markets” says UJ. “No operating margin expansion is expected due to over-reliance on the highly competitive and low-growth South African market. Group Five’s lack of exposure to high growth geographic areas outside of Africa should concern potential investors considering that its three biggest competitors, WBHO, Aveng and Murray & Roberts, have an active presence in Australia, North- and South America, which are higher growth markets.”

Crunching the numbers, UJ arrived at a one year target price of R38.70 using a sum-of-the-parts valuation method, and a one year target price of R34 using the earnings multiplier model. This was done mid-September when the share was trading at R41.00. The share has now slipped down to around R38.

In this local round of the CFA Institute challenge, nine South African universities participated, with four finalists presenting their analysis to judges that included Peter Armitage of recently listed Anchor Capital. Armitage said he was hugely impressed with submissions from the four finalists but cautioned them to develop their views more holistically in the context of the sector as well as the broader equity market. Winning UJ will be going on to Amsterdam in April 2015 for the regional finals, hopefully followed by global finals in Atlanta.

The universities of Pretoria, Cape Town and Stellenbosch all had buy calls on Group Five, citing the high margin Rest of Africa exposure as a big drawcard.

The University of Pretoria highlighted that the company has fully dealt with its Middle East operational closures and that lessons have been learned and taken onboard. A big attraction was its meaningful Rest of Africa order book which reduces dependence on a very concerning South African economy.

The Pretoria team also noted good BBBEE ratings which bode well for local contracts including those from government; and internal appointee Eric Vemer is considered to be a good CEO replacement for the retiring Mike Upton.

The University of Cape Town team believes the market is exaggerating company risk and that Group Five is in fact well positioned to take advantage of the National Development Plan, capital expenditure by Transnet, and Rest of Africa growth.

Rest of Africa activity includes the Kpone gas project, where the company has negotiated upfront payments, and mining housing projects in Namibia and the DRC. The team sees Group Five as part growth stock (because of rest of Africa expansion) and part value stock (because of discount to intrinsic value).

Even more bullish is the University of Stellenbosch, on a strong buy recommendation, with the share price expected to go beyond R50. Stellenbosch likes the Rest of Africa high margin story, as well as growth in the Infrastructure and Concessions division and increasing exposure to power and transport.

Trading at a discount to the sector on several metrics, the recommendation is leaning towards overweight and a definite inclusion in general equity funds.

The UJ team has taken a courageous stand and it paid off. Even the most experienced analysts in the investment game are reluctant to make a sell recommendation, and rather skirt around with obscure calls such as a ‘Weak Hold with Low Conviction’.