Builders in red braces

Construction firms quoted on the Warsaw Stock Exchange do not enjoy a great deal of popularity among investors but analysts assure us that this is a temporary state of affairs

The overall share value of construction companies quoted on the Warsaw Stock Exchange, amounts to 2 per cent of its whole capital. Out of the 200 listed companies, 33 belong to the construction sector and from this we may draw the following conclusions:
-Polish construction companies are relatively small
-construction firms are not highly valued by investors because of their low profitability (the conventional methods of relative valuation such as the P/E ratio, i.e. the relation between a share price and profit per one share, cannot be applied since these companies do not generate a net profit)
-the construction market is very fragmented
How do these factors impact on investors' attitudes to acquiring shares in construction companies? According to Marek Majewski, a PKO BP brokerage section analyst, what must be taken into consideration when valuing the quality of shares are issues, which are at first glance unconnected to the stock exchange. The war in Iraq has caused an increase in price of all raw materials, which are generally quite resilient in volatile times, thus, regardless of the fact that most companies have never operated in the Iraqi market, there is less activity on the stock exchange. The lack of political stability in Poland, caused by the emergence of a minority government, poor macroeconomic results, the likelihood of a continuing decrease in construction and installation prices this year, and finally the uncertainty of the accession referendum results, have also had an effect on investors' attitudes to construction firms.

Remedying recession
All the above affect not only share rates but companies' results often enough as well. Which will cope better in these unstable times?
"It seems to me that medium size companies whose revenue rose at some stage to levels of between PLN 200 and 800 mln are coping best in the circumstances," claims Marek Majewski. "Companies such as Polnord and Mitex, are effectively increasing their share of the market. Larger companies, on the other hand, such as Mostostal Zabrze, Exbud-Skanska or Budimex are finding it difficult to utilize and maintain their entire human and material resources as they face a decline in revenue."
Dariusz Górski, an ING Securities' analyst, confirms this view, recalling the example of Echo Investment. In his view, it is better for the latter not to have ownership of costly resources when carrying out development schemes. "Perhaps this is the key to survival in the difficult circumstances."
Experts claim that smaller companies, which will soon begin to consolidate, such as Mostostal Siedlce, which is merging with Polimex Cekop, and Polnord with Energobudowa, also stand a chance of growth.
"The fact that larger companies will emerge doesn't necessarily mean that they will face the same problems as the major companies. The merger of Polnord and Energobudowa will produce combined revenue of around PLN 400-500 mln, which falls just short of creating the usual pitfalls caused by high production capacity, experienced mainly by companies with turnovers of above PLN 1 bln a year," says Majewski.

Investor - our man
Construction companies with a so-called strategic investor, cope considerably better. This is because financial investors, such as banks, have often failed to react promptly to problems emerging in their companies, as was the case with Mostostal Zabrze, Mostostal Gdańsk and PIA Piasecki.
"Mostostal's management considered the possibility of an emergency issue of shares [aimed at the company's creditors] while the shares were still at PLN 6-8," recalls Marek Majewski. "But now that the shares have fallen to PLN 0.5 and the company is experiencing serious difficulties trying to keep its head above water, (a number of petitions for bankruptcy have been submitted), another issue of stock would face some serious obstacles."
It would seem that Mostostal's predicament, on the brink of bankruptcy, stems from its financial investor Stocznia Gdynia's relative indifference towards the activities of Mostostal's management.

Prospects
What are the odds that in the near future construction firms will improve their results and re-establish their reputation among stock exchange investors?
"As a matter of fact, the share prices of the relatively strong companies such as Budimex and Echo Investment, haven't dropped as much as might have seemed, but because their stock market value isn't greatly different from the results they generate, for investors they are not particularly attractive," says the Head Analyst for ING Securities. "What's more, despite the sector's dreadful standing, a wave of spectacular bankruptcies involving large companies hasn't as yet taken place. Espebepe, Mostostal Zabrze, Mostostal Gdańsk and PIA Piasecki are still fighting for their lives by striking deals with other companies."
Marek Majewski, on the other hand, maintains that a possible decrease in share prices may encourage investors to get more involved in the companies they already control.