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Rate cuts to help building sector
A round of interest-rate cuts in 2009 will bode well for building and construction firms with exposure to the residential sector.
So says BOE Private Clients construction analyst Barbara Price-Hughes, who says rates could be cut by as much as 400 basis points.
"It will stimulate residential activity towards later this year, as it will take time for them [rate cuts] to kick in," she told Fin24.com on Monday.
She said that a cement manufacturer such as Pretoria Portland Cement, would "surely benefit".
"About 40% to 50% of cement sales go into the residential sector and into low-cost housing - in which [construction firm] Group Five is also involved," said Price-Hughes.
She said that even though earnings of some of the construction companies would be "fairly flat" throughout 2009, they should offer some good dividend yields for shareholders. "But they will probably perform better in 2010."
Price-Hughes has put construction firm Wilson Bayly Holmes-Ovcon (JSE ticker: WBO) on the top of her heavyweight construction list for 2009, as it is more likely to outperform other more established construction firms listed on the JSE.
"The company has managed to remain flexible throughout last year," she said, adding that it is the more favourable stock to hold as it has less project risk than other heavyweight construction firms.
For the year to end-2008, WBHO's share price had lost 20.6%, which is far less than the 43.3% drop in ithe construction and materials index.
According to Industry Insight CEO Elsie Snyman, an analyst covering the building and construction sector, the second half of 2008 was "tough" for the building industry.
"The signs that conditions were going to be tight, based on fewer plans being approved for construction by local authorities, were already there at the start of 2008," Snyman told Fin24.com, adding that the building industry now bears evidence of the lagged impact of changes to interest rates.
"We expect conditions to remain difficult in 2009, but are still cautiously optimistic that expenditure on roads, airports and energy infrastructure will continue to increase, albeit at possibly slower rates. "
In a research note, Snyman said that the construction industry provides job opportunities for over 1 million people each year and has been identified by government as a catalyst for job creation to reduce unemployment.
"If the situation does not improve, the industry will face significant job losses."
She said that consumers' affordability constraints need to be lifted, and that the imminent lowering of interest rates would help with this. Also, consumer and business sentiment need to improve.
Once these changes occur, it would take a further 12 months before their impact would be felt by industry players because of the time needed to carry a project through from planning to construction, she said.
"Suppliers in the industry have spent billions over the last year on increasing production capacity and we believe that this will certainly not have been in vain, as it sets the platform for a healthy, growing and prosperous building industry in the future."
"We hope that government can achieve its targets to reduce unemployment and uplift our economic base to achieve 6% gross domestic product [GDP] growth.
"It is critical though that investment in construction is sustained at between 8% and 10% of GDP to make sure that the imbalance of the past (where economic production and expenditure continued to increase without supportive investment in infrastructure, leading to capacity gaps) will not be repeated," she said. |
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