Could government incompetence undo our construction shares?
On Friday I received a question from Tinus. Here's what he asked:
"As alluded to by yourself and other FSPInvest experts, construction seems to be a good area to invest in with a coming recovery on the cards. But what worries me is that the written media (newspapers) are condemning government's capability to release and properly manage construction contracts. How will this influence this sector?"
Tue, 2012-08-21
> Important Announcement: Your chance to meet investment experts Chris Hart, David Shapiro and Byron King
> ARB Holdings left me smiling - here's why!
> Pan African Resources is nearing the final step to doubling its gold production!
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Dear Red Hot Penny Shares Reader,
We had a great PowA! Hour this past Friday, with many great questions. If you joined, thanks for making it a success!
If you still have any questions that you want answered, join me for the next PowA! Hour at 12:00 on the 21st September. If you can't make this date, feel free to mail me your questions and I'll try and cover them in my Red Hot Mailbag section of this weekly update.
You can mail me at francois.joubert@fsp.co.za with the subject line "Red Hot Mailbag". But please remember I cannot give you personal financial advice. I can only answer general queries about investing and investment techniques or strategies. That way all Red Hot Penny Shares members can benefit!
On Friday I received a question from Tinus. Here's what he asked:
"As alluded to by yourself and other FSPInvest experts, construction seems to be a good area to invest in with a coming recovery on the cards. But what worries me is that the written media (newspapers) are condemning government's capability to release and properly manage construction contracts. How will this influence this sector?"
Government is slow with new contracts - but we're protected against its tardiness!
If you look at recent results from construction companies it's clear that the effect of government's bad management and incompetence when awarding tenders have affected many construction companies badly.
Take Sanyati's recent filing for liquidation for instance. It could have been avoided had government paid the company on time!
But fortunately, the construction exposure we have in our portfolio is less geared to government than many of the large blue chip companies...
You see, a massive company like Murray and Robberts can't survive without the big contracts government dishes out. But smaller companies have lots of room to maneuver. They can change markets quicker than big companies can as well.
Dawn, one of the more recent construction shares I tipped is heavily geared to retail sales - as the company supplies the industry with brands like Cobra, Vaal and ISCA (I'm sure you're home has at least one of these brands installed in your kitchen or bathroom)!
So this company stands to make more money as people like you and I spend money to build or remodel our homes! Which is why the interest rate decrease is a great opportunity for the company - it'll lead to increased bank loans for new and existing homes.
We also hold Argent, ARB Holdings and Afrimat - all of which I'm confident are sufficiently well diversified that even if government tenders were to reach a standstill they'd still survive.
That said, government tenders are at least rolling out faster this year than they did last year.
And they rolled out faster last year than they did the year before.
This shows things are getting better - albeit slowly. And our penny shares will be faster to benefit from any small improvements than the blue chips.
Let's take a look at the latest news about the shares in our portfolio:
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Important Announcement:
We’re holding our first ever FSP Invest Symposium in October.
On the day, I'll be presenting a piece on making big money from small-cap investments in the mining space.
I'll also be joined by some of FSP Invest’s top investment minds, including Warren Jeffery, Leon Kok and Gavin Fourie, along with guest experts, Justice Malala, Chris Hart, David Shapiro, Dan Denning, Byron King, Roger Williams and many others...
Come and join in on our discussions about where the markets are headed in the next year, what sectors are hot and which are not.
Reply today and you'll guarantee yourself a 30% discount on the full price of the ticket. Find out more here.
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ARB's results left me smiling!
ARB released results on the 16th of August - and they left me smiling. The company increased revenue 25% and grew profits by another 12%. It also declared an annual dividend of 13.7cps.
ARB is a great company, and it just keeps on growing in almost any market, no matter how bad. As we see improvements in the construction sector, I expect ARB will be first in line to profit from them.
The company has zero debt and a strong bank balance of R180 million which it can easily use to grow organically in the year to come. I'm very happy holding ARB. If you haven't bought some of these shares, wait for a pullback to below 400c, as the share is trading at 435c currently - well out of my buy range.Hold
Petmin's investing in iron ore that could pay off in big ways!
Petmin has increased its investment in the North Atlantic Iron Ore Corporation (NAIC) to a 22.5% stake.
NAIC is currently prospecting on an iron ore claim - which could lead to a mine producing half a million tonnes of iron ore per year for 25 years!
But the company says this mine could be much bigger than that - because it's currently only explored 3% of its claim!
I'm bullish on Petmin in the long term - but the company's shorter-term prospects are a bit slower as exploration takes a long time to reach profitable production.
So I'll make a buy or sell recommendation on the company when results are released towards the end of September.Hold
Pan African Resources is nearing the final step to Evander's acquisition!
Pan African Resources is currently under transformation into a brand new company.
In the last year it's gone from a gold miner only mining at a single mine, to a company that's now also producing platinum at a very low cost.
It's also currently exploring a gold tailings retreatment plant that could see it add a lot to its gold production - again at a very low cost.
And lastly - but definitely not least - its acquiring the Evander gold mine from Harmony. This'll see the company double it's gold production this year!
Yesterday morning, the company announced that it's going to do a rights offer to raise roughly half the capital needed to buy Evander from Harmony. The rest of the money will be from money they already have on hand, as well as the profits Evander's making right now.
The rights offer is at the recent volume weighted average price of the share, which was 190c. So in the short term the share price will be dragged down a bit.
But it'll only be temporary. You see, this deal is earnings enhancing to the company and puts Pan Af on a one year price target of 335c. We're already up 223% on the share, but I would definitely still hold on for more gains if I were you.Hold
Results to look forward to this month:
Country Bird Holdings - 24 August 2012
DRD Gold - 27 August 2012
Village Main Reef - 30 August 2012
Remember, Winhold, Protech Khutele and Afrimat are all trading under cautionary. This means these companies are busy negotiating deals to acquire new companies or are about to be bought out by larger companies. I'll keep you up to date if there's any news on them!
That’s it for this week’s update. Be sure to look out for your next update, due 28 August 2012!
Francois Joubert
Chief Investment Strategist, Red Hot Penny Shares
Here's to unleashing real value!
P.S. If you have any general investing questions or you'd like to know more about the PowA! Hour I host every month please mail me at francois.joubert@fsp.co.za