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Group 5 declares bankruptcy | Securities analyst commentary on the stock

13 March 2019 Commentary from Serfaas Badenhorst, portfolio manager at Momentum Securities

After almost 5 decades of trading on Johannesburg’s stock exchange, South African construction company Group Five was yesterday put into business rescue, with its stock being suspended after it filed for bankruptcy protection. With shares priced at R45 each five years ago, the company says it is likely that the listed Group Five shares are now worthless.

Please find below commentary from Serfaas Badenhorst, portfolio manager at Momentum Securities on the issue:

Were there warning signs that Group 5 was in trouble? And if so, were analysts aware of these?

The South African construction industry has been in trouble for some time now. In September 2017 confidence in the industry was at its lowest level since the third quarter in 2000.

In March 2018 Group Five announced on SENS that investors should expect a weak market update. This was followed by very weak 1H2018 results being released, with revenue down -15.5%, loss per share up 156% to a 773 cents loss, as well as their order book down by 8.2% year on year. By then the share was already in free fall and this just added to the share price woes. Although the company announced that it raised funds from a consortium to assist with liquidity, analysts were sceptical whether the effective turnaround plan could be implemented in time.

Are the issues symptomatic of problems across the sector?

The biggest reasons for this can be attributed to sluggish economic growth, uncertainty in regards to policy and an underperforming rand spilling over in a lack of decent infrastructure spending which affected the entire construction industry. For some construction companies the mentioned factors had a bigger impact on their financials and outlook, one of the companies adversely affected was Group Five.

For investors who hold other construction stocks – what should they be looking out for?

According to some analysts the South African construction industry will grow at +2% for 2019 which is already an improvement from 2018. One of the biggest concerns for investors in the construction industry is the long road to recovery especially for cash strapped companies, investors will have to be prudent when investing in these stocks.

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