In one of my previous blogs, I described the problems with analyzing financial statements of construction companies. My central message was that purely quantitative earnings-based balance sheet analysis does not provide a robust indication of the value of the company, and that preference should instead be given to longer-term dividend trends and qualitative observations such as management changes.
As the half-year reporting season has just come to an end, I decided to do a practical test of Austria's listed construction companies.
For this purpose, I compare some key figures with the performance on the stock market and interpret the correlation.
Graph: Selected Ratios PORR AG (Source: Vienna Stock Exchange)
Graph: Selected Ratios Strabag AG (Source: Vienna Stock Exchange)
Graph: Selected Ratios SW Umwelttechnik AG (Source: Vienna Stock Exchange)
Looking at the sets of key figures above, the following statements can be made:
- The correlation between earnings and share price is very weak
Among the three construction companies listed at Vienna Stock Exchange, only SW Umwelttechnik shows a more or less constant price/earnings ratio. In the case of Strabag and PORR, the only observable correlation is that share price and earnings both fell in H1 2020, as a result of the corona pandemic, and rose again in the following year.
- Dividend payments have more significance
For all companies and in almost all years, a relation between dividend payout and share price can be observed. The relationship is relatively weakest at PORR, but even here it is clear that years without dividends are not good for the share price.
- Qualitative factors and the "story" make the difference
If we look at the financial statements of the three companies, we see that Strabag and SW Umwelttechnik place a strong emphasis on continuity. In simple terms, the message can be summed up as "we have found our way and are simply following it consistently". As a result, there is no reason for personnel changes. The message from PORR is rather "we see potential in many places and therefore want to improve continuously through change".
The interpretation of the messages is certainly subjective to a certain extent and a priori (at least to me) both messages seem to have their justification. If you look at the personnel departures at board level, they are in line with the respective message. SW Umwelttechnik, for example, had no changes on the board during the period under review, while Strabag had one change due to retirement. The comparative value at PORR, on the other hand, was higher.
The cause/effect could be discussed in detail, and some personnel changes may also be due to external factors, but qualitative factors such as stability and message seem to have an impact on the value of the company.
In sum, I stand by three statements.
First, the meaningfulness of (semi-)annual financial statements in the construction business is very limited.
Second; a continuous dividend development is the most reliable quantitative factor.
Thirdly, a qualitative analysis of the long-term development of the company and the messages communicated does no harm in any industry, but it should be given particular weight in the construction sector.