Saturday, September 17, 2016

Do not buy the shares when engineering and infrastructure companies secure multi-million dollars contract

When you read in the news that an engineering and infrastructure company secures a huge contract, most novices will see it as a sign to buy the shares.

My advice is: do not buy.

If you have the stock, you can choose to sell or hold on to the stock.

Why is that so?

The reason is that this company will have to increase its inventory, manpower and other cost in order to commence the construction work to fulfil the contract.

It has to take on huge debt to finance its working capital. 

This means that the dividend will be lesser, and it also means that the risk of the company getting bankrupt is higher.

In many cases, for such multi-million dollars contract, the payment will be made after completion of certain stage, and even then, there is a risk of re-work that adds to the cost. 

Sometimes when the project is delayed, the company has to pay the damage. 

Such large contract usually means the resources of the company are tied up for a number of years.

If the construction takes three years, you can wait till three years later, when the company successfully completed the work before you buy the shares.

You are more likely to gain from both capital gain and a bountiful dividend payout.

This concept of not buying at the point of announcement applies to construction companies too.

The best is to buy just after the completion and handover of the project, and before the release of the annual result.

Once the annual result is out, and the announcement of a special dividend on top of normal dividend is out, the share price will be much higher.

If you buy a month before the release of the annual result, you will have bought the shares at a low price, and you can sell it for capital gain or keep it for the high dividend yield.

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