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Predicting Future Contract Profits
Our earlier predictions are proving too pessimistic in case of building
construction firms, and too optimistic in case of infrastructure
developers who are experiencing increasingly fierce competition.
Overall, we expect record earnings showings from construction
companies in 2009, supported by a slowdown, and then a downturn in
costs, which did not affect fixed contract prices. The future is much
less certain, however, when it comes to profitability, which is under
pressure from heated competition and a possible rebound in building
costs. Risks entailed in aggressive price policies, aimed at capturing
as many contracts as possible, will materialize once building costs
start rising again. Such an upward shift in cost trends will be preceded
by a shift in the economic momentum, followed by an expanding
range of contract opportunities boosting order backlogs. An erosion
of profitability is a real risk for 2011, but by then, the outlook on the
construction industry will have changed to a growth story (at the
moment, construction can be considered a defensive sector). We
recommend accumulating and buying construction firms that are
relatively low priced, that operate in appealing markets, and that have
accumulated strong order backlogs. In turn, we give hold and reduce
ratings on expensive stocks facing profitability erosion and
disappointing earnings seasons.
Factors Affecting Profitability and Contract Acquisition
There are many factors that could depress future margins achievable on
new building contracts. They include intense competition, contract timelines,
construction risks, punctuality, and customer profiles. Based on these, we
can point out which companies are more sensitive, and which are less
sensitive to profitability erosion. We would include Elektrobudowa, Erbud,
Mostostal Warszawa, Polimex Mostostal, and Rafako in the latter group.
Focus on Smaller Builders
After taking a closer look at the market values of small and medium-sized
building companies, we have a neutral view in Pol-Aqua. Mostostal Zabrze
seems overpriced, while Hydrobudowa Polska can be considered a relative
bargain. Energomonta0 Południe and Energomonta0 Północ have great
prospects ahead of them after the launch of Polish energy capacity
upgrades, but Remak and Energoinstal are cheaper. Chemical-engineering
firms like Mostostal Płock and Naftobudowa are not only overpriced, but the
outlook on their future profit margins is foggy. Industrial-engineering firms, in
particular the Bydgoszcz-based Projprzem, are an interesting subsector.
Successful contract acquisition may dramatically change the perception of
ABM Solid. We are neutral on 7urawie Wie0owe and Ulma, and we like the
attractive price of Elektrotim.
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