Analysts at S&P Capital IQ Equity Research have changed their assessment for the European Construction sector to Marketweight from Underweight. “We expect construction output to decline by a further 0.4% in 2013 and believe that global lead indicators are near their troughs as the effects of European austerity measures are already mostly priced in,” says Jawahar Hingorani, S&P Capital IQ Equity Analyst.
Overall, the construction sector has made good progress on balance sheet repair. Nevertheless, year-to-date (30 November 2012) the sector has underperformed the S&P Europe 350 by 4% and currently trades at a c.9% premium on forward P/E to the market versus the average 10-year historical premium of 11%. “In our view, based on the sector’s high exposure to Europe, which we estimate generates approximately 68% of its revenue in 2012, it is not out of the question that there is a further contraction in this premium in the near term before we see a reversion to the mean,” summarises Hingorani. “Public finances in Europe are tight; therefore an increase in civil construction projects is unlikely. However, we see potential opportunities in the emerging markets and the US.”
S&P Capital IQ Equity Research sees four key themes for European contractors in the near term: austerity, deleveraging, diversity, and dividends. “The impact of austerity is negative for the sector as a whole, while deleveraging to shore up balance sheets comes with reinvestment risk,” comments Hingorani. “We view exposure to emerging markets and non-construction diversification positively; this can generate steady cash flows which in turn lead to higher dividends”.
In the long term, Hingorani is positive on European civil contractors with a significant emerging market footprint: “In our opinion, there is a need to develop infrastructure in faster growing economies. The emerging markets are characterised by a burgeoning middle class, rapid urbanisation and environmental challenges. Companies in our coverage well positioned to benefit from this include Skanska, Hochtief and Ferrovial, as they established positions in Latin America and Asia Pacific via acquisitions prior to the onset of the global financial crisis”.