Shares: As solid as houses: Quentin Lumsden pinpoints some strong Eperformers in construction

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The Independent Online
BEARS are having a field day in the construction sector, with share prices in free fall. The sector is, in general, massively oversold. Some will be wondering whether this is throwing up opportunities. The answer is 'Yes', although patience may be necessary to reap the rewards. Some smaller construction companies have strong balance sheets and good niche businesses which are enabling them to side-step most of the problems in general construction.

Because of the prevailing gloom, these companies are on undemanding ratings and should reward their shareholders with climbing dividends.

A good example of a company well placed to thrive even in the present conditions is Henry Boot at 211p, a small construction company based in Sheffield. Like many construction companies, Boot is family-run but recently had a five-for-one share split to improve marketability. However, the company is not immune to the industry's problems:analysts think it is making almost no profit from construction turnover, which makes up pounds 100m of total turnover of pounds 130m.

Nevertheless they still expect the group to keep profits at around pounds 6.5m against the pounds 6.77m reported for last year. It will do this largely because of its rock-solid balance sheet. A property portfolio in the books at pounds 29m is generating pounds 3m in rental income while interest on cash balances of pounds 14.6m should take the contribution towards pounds 5m or more. Add in steady profits from its housing business - perhaps pounds 1.5m - and any contribution from construction is icing on the cake. The shares yield 3.4 per cent, asset backing is around 160p a share on conservative assumptions and the p/e is around 12. Any weakness because of current nerves would be a wonderful opportunity for long-term investors.

Another specialised construction company that looks well placed to survive the recession with its progressive dividend record intact is USM-quoted Eve Group. Recent figures show turnover and profits falling, with earnings per share down from 29p to 22.5p. But the company considers this a good performance in the worst recession the industry has experienced for 50 years. Margins on the construction side actually increased because much of the turnover drop was in low-margin general construction.

The key to Eve's success and the expectation that profits may increase in the current year is that it is one of the country's leading specialists in the transmission market.

The company supplies and maintains overhead cables and erects towers for the electricity, radio and television industries. The regional electricity companies, National Grid and companies such as Vodafone are all important customers, and there is plenty of work around with new power stations and new electricity transmission infrastructure being built.

The company is also cash-rich, though it expects to announce two smallish acquisitions to strengthen its specialist transmission businesses and bring in customers from the free-spending water industry. On a p/e of 11 and a yield of 5.1 per cent, the shares look attractive.

More exposed to the problems of general construction is Tilbury Douglas, the medium- sized group formed by last year's merger of Tilbury Group and Robert Douglas. This was a merger between two healthy businesses which has enabled the group to make some provisions to protect profitability.

The company has a strong balance sheet and expertise in niche areas such as the water and sewage industries, which should add to its resilience. The wave of downgrades being made by sector analysts almost across the board has left Tilbury Douglas almost unscathed, with projections down from pounds 24m to pounds 22m in the current year and pounds 27m to pounds 25m for next year. At 565p, to yield over 8 per cent prospectively, these shares too look attractive.

(Photograph omitted)

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