MarketViews

It's no secret that the construction industry's present boom has sent the construction shares sky-high, but is there any other angle you could take to gain from the spill-over effect of this boom?

Well, that's where "late play" construction shares come in (of which I have discussed in my February Small Caps Newsletter). These are shares in companies that benefit from the after effects of the construction of large numbers of buildings, roads and infrastructure. For example, plumbers and gardeners (someone has to service the new houses), home retailers (someone has to stock the new homes), and even IT companies (someone has to sell the new computers and software/networks to all the new corporate buildings).

If I could invest in any business right now I would invest in a plumbing business.
Why..?

Well, for a number of reasons. Plumbers are in short supply with skills barriers to market entry that prevent just anyone competing with them. Plumbers basically get annuity income from new suburbs, as a regular number of houses will have problems and need their services. Plumbing is not a "flashy" investment (like "gold" or "oil"), thus the market tends to ignore it.

Unfortunately, there are no listed plumbing shares…but, there are plumbing related shares, because they sell the plumbing related goods. Alert Steel (listed on the AltX on 1 March 2007) sells—among other things—plumbing and hardware. PSV and Rare Holdings produce pumps and valves etc. that can be used in plumbing.
All three of these companies offer very good "late play" options.

What other "late play" construction shares are there?

Well, Safic is one, providing the flooring to new buildings, which is often the last component in a building project. Thus, provides Safic "late" profits after all the other construction shares have shown theirs.

Amecor manufactures security components and maintains private security networks for private security companies like Chubb and Atlas. The more houses and neighborhoods that spring up, the more the demand for security (components and services)…but, of course, this only comes along after the houses have been built and the building companies have taken their quick profits.

Datapro is another one, as new houses and new business all need an ISP…but, unfortunately it appears that the market has noticed this with DTP trading at present PE of around 40.
So…how can any of this be of use?
One word: strategy.

The most money is not made in investing into companies that everyone has already bought up, but into anticipating this buying and entering the market just before them. As (potential and real) earnings is the main driver in share price, anticipating these earnings in the future is paramount to out guessing the market and finding true value.

In a market where construction is booming, in my opinion, this value is found in "late plays".

Yours sincerely,
Keith McLachlan