Record Highs

01 May 2008

Week 32 Saw Construction Europe's CET Index for the whole industry hit an all-time high of 137,71 points. Its three constituent parts, the CEE Index for equipment manufacturers, CEM (materials producers) and CEC (contractors) also reached their highest points that week, at 145,85, 120,00 and 159,86 points respectively. This gave the 56 companies that make up the CET a total market capitalisation of € 305 billion.

There was a fall-off in week 33, with the CET finishing at 135,29 points, a net gain of +5,26% from week 26. Of the three industry sectors, it was the equipment manufacturers that performed the best, with the CEE gaining +9,8% over the same period. Contractors’ stocks also had a good few weeks, with the CEC closing up +6,51%.

On the surface, the materials sector looked poor with just a +0,61% gain for the CEM. However, Aggregate Industries was removed from the Index in the period under review, following the announcement that Holcim had acquired its entire share capital. This action was taken to avoid double counting in the Index.

This general buoyancy was reflected in the other European indexes, with the FTSE 100 putting on +3,05%, the CAC 40 +4,75% and the DAX Composite +5,87%. All three blue-chip indicators have enjoyed 12 months of solid growth. The FTSE has gained +20,5%, the CAC 40 +24,5% and the DAX +30% since week 33, 2004.

While the Topix has also been good, the Dow looks weak. Although it managed a reasonable +2,73% gain between weeks 26 and 33, it remains volatile, with a poor longer-term performance as a result. In the last year it has gained only +5,53%, with the ever rising price of oil being a major negative factor.

Materials

Despite an apparently quiet few weeks, the materials sector remains by far the most dynamic of the three construction segments. Mergers and acquisitions continue to drive the market, and week 28 saw Saint-Gobain put in a UK£ 6,75 (€ 10) per share bid to acquire BPB.

This bid was rejected by the board of the UK-based gypsum products producer, and Saint-Gobain came back with a UK£ 7,20 (€ 10,67) per share offer three weeks later. This was also rejected, and market sentiment seems to be that something in the range of UK£ 7,50 to UK£ 8,00 (€ 11,11 to € 11,87) would be accepted. This would put the purchase price at UK£ 4,01 billion (€ 5,94 billion).

There are also some questions about the logic behind Saint-Gobain's bid. Unlike the Cemex-RMC and Holcim-Aggregate Industries deals that merged two companies with similar products but different geographic strengths, Saint-Gobain and BPB do not have any products in common. It would therefore be difficult for Saint-Gobain to get any big synergies following a merger. This fact may in itself prevent a deal taking place, as the French company will not want to pay a big premium that it cannot justify with future savings.

Nevertheless, Saint-Gobain's bid added +38% to BPB's share price between weeks 26 and 33. Most of the other companies in the CEM also enjoyed gains over the period, although of course none were as marked as BPB's rise.

Hanson was the best of the rest with a +8,19% improvement thanks to good half-year results and, again, subdued take-over speculation. While the company is seen as a potential acquisition target, the unknown quantity of its on-going asbestos litigation in the US makes this an unlikely prospect.

Equipment manufacturers also had a good few weeks, with up-beat results from the major US and European manufacturers helping to push up share prices.

This is a nice problem to have, because it should mean that profitability will improve as these machines are built and paid for. More recently ordered equipment is likely to have a higher price, as manufacturers continue to pass on the higher cost of steel to their customers.

Double-digit share price gains were very much the order of the day for the sector in July to mid-August. The only exception was Deere, which reported lower than expected sales of agricultural equipment. Construction machinery, however, remains in strong demand, and this was reflected by Caterpillar's twofor-one share split in week 28, which doubled the availability of its shares. Ingersoll-Rand is planning a similar split in week 35.

Like the equipment sector, contractors’ shares enjoyed a buoyant mid-summer period. The CEC gained +6,51%, with all but two of the companies in the Index seeing their share prices rise. Mowlem continues to have a tough time as it restructures its construction services division, while Balfour Beatty's otherwise good half-year results were marred by news that materials costs on some projects had lowered its profits.

But aside from these two losses, it was a good few weeks for the sector, with generally good financials and improving order books pushing share prices up.

Currencies

Following several months of appreciation against the Euro, the US Dollar steadied in July and mid-August. Its value was a little up and down, but it seemed to have settled around the US$ 1 = € 1,22 mark by week 33.

The Euro's fortunes were mixed against other currencies. It gained against the Yen, Danish Krone, Norwegian Kroner and British Pound over the seven week period, with the latter improvement linked to the Bank of England cutting -0,25% off interest rates at the start of August.

However, the Euro lost ground against the other major European currencies, the biggest being a -1,48% slip against the Hungarian Forint.

Outlook

Half-year results painted a bright picture of the construction industry's health over mid-summer, and the strength of many companies’ order books should keep share prices high over the medium term.

However, the cost of commodities, particularly oil, continues to have an impact. This is affecting the US and Dow Jones Industrial Average most prominently, but it is a global issue due to its negative influence on inflation and economic growth.

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