Non-Residential Cycle

The Non-Residential Cycle is churning and at the moment Macquarie Research Equities (MRE) believes that Australia is in the midst of an up-tick in engineering and non-residential construction spending. Wal King, CEO of Leighton has recently said, "With all of this activity and the opportunities still emerging, it really is difficult to recall a more positive environment for the group. As a result of our momentum and the continuing strength in both the infrastructure and resources sectors, we are well placed for sustained growth over the next few years." "MRE believe Australia is experiencing a period of strong growth in engineering and non residential construction spending. This is forecast MRE haveto come from both infrastructure and resource spending. Identified are the $84bn in resource projects and $100bn in infrastructure projects currently under consideration in Australia. This compares to current annual resource and infrastructure spending of approximately $31bn." "As the cycle matures, MRE believes investor focus will turn from the pipeline of work to the execution of contracts. This is where the nature and wording of contracts becomes critical. Fixed price or lump sum contracts are generally the riskiest type of contracts while alliance or reimbursable contracts are the safest. In terms of contract risk, Transfield (TSE) and Worley (WOR) are the safest. MRE's key picks of the larger stocks are TSE, WOR, Dyno Nobel (DXL), Coates (COA) and Orica (ORI), all rated outperform. These stocks all stand to benefit in FY07 and FY08 from the expected growth in the cycle and have lower risk profiles."