Key message: There is a relatively high probability that government will use
SANRAL to kickstart infrastructure spending as a stimulus for the economy. Long
overdue, this would boost the road construction sector.
- Raubex has issued updated guidance for FY20 earnings, with diluted HEPS expected to increase by 120-140% to 125.4-136.8c. This implies an increase in operating profit in 2H FY20 of 15% over 1H FY20. Included in 2H is a R75m loss adjustment for the recent property sale in the Roads & Earthworks division.
- Previous guidance pointed to HEPS growth of at least 75% – this new guidance is a significant improvement on that.
- Management guidance is that the Covid impact for April and May will be a net cash outflow of R200m (assuming operations are permitted to recommence on 1 May). The final dividend will be skipped, a move common to most companies at present.
- Raubex has taken steps to reduce the size of the business over the past 18 months as the road construction-related order book has remained low. Anticipation of a resumption of tenders by SANRAL has been evident for an extended period, with activity finally looking to emerge just as the coronavirus impact hit.
- Government has announced that there will be a phased restart of the economy with sectors and activities with the lowest risk, highest economic impact and risk of closure being allowed to start up again.
- President Cyril Ramaphosa announced last night “Central to the economic recovery strategy will be the measures we will embark upon to stimulate demand and supply through interventions such as a substantial infrastructure build programme….. We will outline this in coming days.”
- We do make an assumption that SANRAL projects will be kickstarted as part of the economic stimulus package – and highlight at the same time that current forecasting ability is unusually low. We will adjust our forecasts as new or contradictory data emerges.
- We revise our Target Price to R25.50 based on higher expected FY20 results, and a release of road work anticipated over the coming months.