[miningmx.com] — MILD indifference is the strongest emotion most analysts display towards opencast mining contractor Buildmax.
Not only is the group exposed to some of South Africa’s most uninspiring industries but it also recently reported dismal results – again.
Yet the share has stirred some investors to passionately defend it against its naysayers.
The share’s staunchest supporters cite Coronation Fund Managers and asset manager Brait’s direct interest in Buildmax in that “wink, wink’ kind of way that suggests both companies are on to something.
However, since Coronation and Brait began spending money on the share, its price has continued a steady march south.
In 2008, Brait spent R200m on a 14,8% stake in Buildmax at 150c/share. It also paid another R132m to acquire a further 9% at 110c/share later that year.
Coronation Fund Managers holds a 21% stake in the group following a rights issue in October. Its price has since fallen to 18c.
Buildmax operates in all the sectors you don’t want to be exposed to, says Keith McLachlan, of Standard Bank. The group’s focus is on opencast mining services – a low margin, high capital expenditure-spend sort of industry. Buildmax is also in the equipment hire industry, which competitor Erbacon will be exiting, because the segment “suffered from the weak levels of activity in the general construction sector’.
And let’s not forget Buildmax’s building materials segment contributes a third to its business. That’s another sector you’d rather avoid before the average indebted consumer again finds the will to build a new house.
The commercial building sector is also only expected to recover in a few years’ time.
So surely punters are really investing in the future of the coal industry, which seems rosy at first glance. Although Eskom’s needs are likely to boost the production by coal mines, the secret is out and contractors are flocking to the mines in the hope of securing more work.
“The share is undervalued,’ says Coronation Fund’s analyst Alistair Lea. “Investing in this share isn’t for the fainthearted, but we’re prepared to take the view we’re seeing a cyclical low in the industry and that the cyclical high will come again.’
Coronation impressed in March this year when they sold down a material part of their stake in Sentula Mining before the share lost almost half its value on the back of accounting errors and lower forecasted earnings.
The group also says it expects its investment in Buildmax to pan out like its York Timber investment, which it underwrote during a time of financial stress and has since pulled itself together to increase Coronation’s investment by more than 60%.
But the jury is still out on Brait’s ability to spot a small share with a big future. Analysts say the group was most likely interested in owning a large chunk of a relatively illiquid company.
At a price of around 18c, the share is trading at a premium to its tangible net asset value of 17c/share – not leaving investors much of a safety margin.
Either way, investors in Buildmax should keep their ears to the ground: if Coronation bails, it’s time to drop the fervour in exchange for cold reality.
– The article was first published in Finweek
