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JSE-listed construction and engineering groups showing strain

Posted On Friday, 07 March 2014 17:19 Published by
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South Africa's construction industry is not out of the woods yet, despite data pointing to an upward trend.

 Kobus Verster

In the fourth quarter of last year construction confidence rose to a new five-year high, with a recovery in construction activity and moderation in tendering competition.

However, the balance sheets of major JSE-listed construction and engineering groups are still showing strain.

Aveng's Australasia and Asia segment is delivering four times the value of its home continent. The company says it has seen "no material improvement" in South African infrastructure spending.

The Asia-Pacific region has been a lifesaver for big South African construction firms, including Aveng and Murray & Roberts. Chinese demand for Australian minerals has complemented a boom in oil and gas projects in the region, despite the global recession.

But as China's commodities demand tapers in favour of consumer-led economic growth, and major oil and gas projects near completion, Aveng is turning to countercyclical infrastructure spending in places such as Singapore and Australia.

Legacy issues at home and abroad still echo or remain, though Group Five says legacy costs in the Middle East that were once a heavy burden are now "really not material". In the meanwhile, its transport investment and concession projects in Eastern Europe and Africa have come to exceed 25% of core group operating profit.

But Aveng's Grinaker-LTA construction and engineering division in South Africa and the rest of Africa is still executing contracts at "inadequate margins". It says fixed costs are still too high in the business, while there have been delays in the resolution of project claims. Labour disruptions in South Africa directly cost the group R96m in the past six months.

Meanwhile, the roll-out of big projects in the government's R4-trillion infrastructure plan has largely stalled, as major construction and engineering work on Eskom's new Medupi and Kusile coal-fired mega power stations comes to a close.

In its interim results to December, Aveng's headline earnings per share plunged 21%, even as overall revenue rose 11%.

Aveng Grinaker-LTA is targeting break-even only in financial 2015. New CEO Kobus Verster says the past six months have been a period of consolidation and repositioning of the group's diverse operations. But he also says there is "a way to go" before it reaches its full potential.

"Following on from trading updates, it wasn't much of a surprise when earnings came out," Suraj Sookdhew, head of portfolio management at RMB Private Bank, says. The Queensland Curtis liquefied natural gas pipeline and facilities project in Australia has required heavy levels of financing by Aveng in recent years, while outstanding claims on the project are a drag on the group, he says.

But Group Five, which operates in African, Middle Eastern and Eastern European markets, says despite continuing frail construction markets in South Africa and the rest of Africa, mining and cross-border energy projects, and Africa's general infrastructure needs are likely to boost the pipeline of work.

Unlike Aveng and listed peer WBHO, in the six months to December Group Five has seen revenue from continuing operations shoot up 55.7%, with headline earnings per share soaring 40.7%. South Africa still accounted for 82% of the secured construction and engineering order book.

CEO Mike Upton says he expects to see "massive growth" in African power and oil and gas projects, along with a resurgence in mining. "But we are still really waiting for a big roll-out of infrastructure in South Africa," he says.

In its interim results to December, WBHO's operating profit fell 15.1% as headline earnings plunged 20.4%, even as revenue climbed 11.3%. The group has had operational problems at its Capital Star Steel pipe factory in Mozambique, and lost money on the disposal of a shelving business. In addition, it has seen poor mining activity in West Africa and generally.

CEO Louwtjie Nel says that work has "dried up" on West African mines. This is also a concern for the group in South Africa and Australia, as mining is a significant chunk of profit, he says.

But WBHO saw 15% revenue growth in its South African businesses in the period. It says building and civil engineering largely drove this as a result of sustained improvement in the South African building sector.

Group Five derives 71% of its building and housing revenue from large-scale public-sector housing projects, including low-cost housing. While it says there have been significant delays in the awarding of public-private partnerships and conventional public-sector tenders in South Africa, it has mitigated this by securing contracts in public transport, hospitals, prisons, magistrates' courts and affordable housing.

Mongezi Mnyani, CEO of the National Home Builders Registration Council (NHBRC), says that the body works closely with government agencies, including the Department of Trade and Industry, the Council for Scientific and Industrial Research, and the Construction Industry Development Board.

The state-mandated body also works with private-sector companies including Group Five and ArcelorMittal South Africa, the country's premier steel maker, which are involved in modular housing developments.

ArcelorMittal global subsidiaries make insulated steel panels to construct low-cost housing, schools, shopping centres and factories. The group has already built schools from these materials in Tshwane and the Eastern Cape, and will do so across all of the country's provinces.

The NHBRC has been tasked by the Department of Human Settlements to co-ordinate building work in municipalities and provinces.

Its Eric Molobi Housing Innovation Hub in Soshanguve, near Pretoria, supports innovation in affordable, quality housing for South Africa's most vulnerable citizens, using technologies developed both in South Africa and internationally.

Mr Mnyani says there has been a lot of improvement in low-income housing over the years. The NHBRC trains and dispatches inspectors to projects nationally.

The laws governing the building of habitable structures have also changed to accommodate new technologies. In this regard, Mr Mnyani says private-sector construction and engineering companies and industry bodies play a critical role in quality assessment and ensuring such buildings will stand the test of time.

"We have seen that even the banks are starting to accept them. I think, bit by bit, we will be able to deal with the fears of the market," says Mr Mnyani.

"Parliament is keen to utilise such systems with regard to the housing backlog.

"I think we have been disjointed as government ... but now we are starting to see co-ordination among government itself," he says

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