African Infrastructure Investment Fund 2 has announced its first close with unconditional commitments totalling $320m.

INFRASTRUCTURE development bottlenecks are weighing heavily on SA’s construction companies.

Construction IndustryConstruction companies are taking advantage of the surge in infrastructure spending in developing countries around the world.

But the pace of infrastructure development in SA, despite government’s commitment to spend R845-billion in the next few years, is cause for considerable concern as major projects are being delayed, cancelled or reworked.

Not only does this affect the construction companies, but thwarts efforts to create jobs in an industry that could make a meaningful contribution to job creation and economic growth.

Construction companies, who all reported results over the past two weeks, experienced a year characterised by the loss of major multibillion-rand projects in the Middle East, delays in public-sector infrastructure investment, the postponement or cancellation of mining and other big projects, and the effects of a strong rand.

These factors affected companies to varying degrees, and strong results from companies like Basil Read and Wilson Bayly Holmes-Ovcon (WBHO) indicated that they hardly seemed to notice.

Luckily, some major construction projects had already started before the economic meltdown, including World Cup stadiums, Eskom’s build programme (although some parts have been delayed), airports and roads.

SA’s construction companies have delivered the World Cup stadiums, and continued to complete and get major projects internationally.

Their order books shrank, but have since stabilised or are picking up.

But they are all concerned about whether government will ramp up its infrastructure plans as significant portions of their project pipelines were expected to be taken up with such activity.

During the past year they already faced delays relating to Eskom’s power plant build programme, with the Kusile plant being pushed out, initially for a year, but many say it will be longer. There have also been delays and disruptions to the Gautrain and roads and transportation projects.

In the interim, they are focusing on seeking projects elsewhere to secure a strong order book and revenue stream.

This week Aveng reported a 33% drop in headline earnings for the six months to December. Revenue declined 5% to R16.8 billion, largely because its manufacturing and processing division was affected by the steel price, as well as poor results from Australasia and the Pacific regions. SA and Africa operations were strong.

Tender development expenses took a chunk out of operating profit.

It secured contracts in SA and West Africa, including at Sishen and the Sadiola gold mine in Mali.

Aveng said the rate of public sector contract awards in SA was slow, but construction spend in Australia “is underpinned by large-scale public infrastructure investments”.

Results from other construction companies were mixed. Murray & Roberts’ earnings dropped sharply, but Group Five’s earnings were 8% higher.

WBHO and Basil Read reported strong earnings growth.

Group Five said that, to mitigate the downturn in the private sector, future work would be provided locally by infrastructure investment in housing, transport, prisons, government buildings and hospitals. It said that “the timing of resumption in government infrastructure spending has been and will remain a key factor for the domestic South African construction industry”.

While there is planning for R40-billion in the public-private partnership and concessions market for large public buildings, roads and power developments, only a few awards have been made, it said.

In the Middle East, however, there were new infrastructure opportunities, including in power and heavy industries.

At Group Five’s construction business, over-border work contributed 17% to construction revenue, down from 45% the previous year, reflecting the impact of the cancellation of Middle East orders and the decline in the mining industry.

But now it is focusing “on a more aggressive over-border presence in favour of public infrastructure contracts, as well as other opportunities”.

Murray & Roberts’ order book is heavily weighted to domestic major long-term public sector projects, it said. The order book has increased by 10%, but is still 27% below the R60-billion of December 2008.

“It is the group’s view that to attract significant new private-sector investment back into the South African market, tangible evidence is required that the infrastructure backlog is being replaced and enhanced with an infrastructure surplus.”

Middle East markets, with the exception of Dubai and Bahrain, have rebounded.

Murray & Roberts said it was involved in a delay and disruption claim relating to Gautrain, brought about by late transfer of land, dolomite rectification works and funding constraints.

About R2-billion of its working capital was in domestic public sector projects, of which about R350-million was in overdue debt. In the transport and power sectors, there have been delays with current contracts, in new contract awards and with the certification of payments, it said.

 

Friday, 21 August 2009 02:00

Looking out for new markets

There are indications that recovery may be on its way for some companies in the construction sector, but how strong will it be and how long will it last?

Construction IndustryA year ago, construction companies had thick profit margins and a seemingly never-ending line of large projects in the offing. They had geared themselves for what the most optimistic executive may have seen as an era of perpetual growth.

The credit crunch in the latter half of last year abruptly removed the rose-tinted glasses. Suddenly companies found themselves in cost-cutting mode and were trying to assess if their order books were as strong as they had thought.

Looking at recently published results and trading updates from a number of construction companies, indications are the sector is in a healthier state than previously thought. Numbers for the 2010 financial year are expected to be good. Group Five, for instance, increased revenue by a healthy 36%, to R12bn, and operating profit 25% to R797m for the year to end-June.

This does not mean the wider malaise in the economy is not affecting the sector. Aveng warns that headline earnings per share will be 20%-25% lower for the same period.

The sharp drop in commodity prices at the end of last year hurt construction companies like Aveng, which makes steel products.

But despite such knocks, companies have mostly adapted well to the new environment by cutting costs, says Rhynhardt Roodt, an analyst with Oryx Investment Management

Group Five says it has restructured its steel operation to cope with the new environment. “It is the right size for a market that is a little weaker,” says CEO Mike Upton

Besides the fall in commodity prices, the drying up of project financing has not helped, as it has effectively reduced the pool of projects and led to the cancellation of some — even in rich regions like the Middle East.

In Dubai, Murray & Roberts (M&R) and Group Five have seen the cancellation of projects valued in the billions of rands. “We did not think national projects would be affected. We were taken by surprise,” says Upton.

Group Five lost a R4bn project and moved quickly to cut overheads. South Africans were repatriated and contracts with foreign workers terminated. But it helps that 90% of the value of this project was replaced with new contracts in SA, says Upton.

The cancellations in Dubai do not mean there is no life in the construction sector in the Middle East. More than US22bn worth of contracts has been awarded across the Middle East since the beginning of the year to July 24, says business intelligence website MEED

Despite the disappointments, SA companies operating in the region still believe they have a future there. M&R had nearly R15bn erased from its order book. But on the upside it has signed a R4bn deal to build a hotel in Abu Dhabi. Group Five’s order book for civil engineering in the region stands at R590m.

The worst seems to be over in the Middle East but, despite a recent rally in construction stocks, concern about the longer-term health of construction companies is about how they would manage in an environment that may have lower economic growth than what they have become used to over the past few years.

The order books of companies might be full for the next 12 months or so, but what might happen after the infrastructure for the soccer World Cup is completed is spooking investors.

This is why the valuations of companies in the sector are trading at a relatively low p:e. The sector’s overall p:e is only 7,86 and the construction index is down from a high of 84,13 points a year ago to 50,3.

The latest research on the sector backs this view. The FNB civil construction confidence index dropped from 60 in the first quarter to 48 in the second.

The deterioration in private-sector fixed investment in mining, manufacturing and property development is given as the reason for the drop in the index.

The construction sector is not blind to the challenges — it foresees not only tougher competition but also more irregular patterns when it comes to awarding contracts. “It could get a little lumpy out there,” says Upton.

With fewer tenders on the table, margins are expected to become a lot slimmer and Roodt says he will not be surprised if a few unlisted companies go under.

Upton, however, is confident his group will continue to do well and says there is about R70bn worth of work out there that the company is interested in. A large portion of this work comes from government’s R800bn infrastructure development programme.

Bidding for more government work during a recession might seem like an obvious move for construction companies but it does not come without risk. First, government is not a prompt payer and, secondly, there is concern over the state’s capacity to generate funding for these projects.

Upton points out that Group Five is also looking at other areas of growth, like building business in other African countries. He says that some mining projects that were initially cancelled when metal prices collapsed last year are now going ahead.

The struggling economy can also foster a better environment for mergers. Basil Read and the mining-focused TWP announced last week that they were in merger talks. Roodt says merging in the current climate is smart because whatever costs arise from the deal can be dealt with while the economy is still weak.

But for the industry to really get its wind back, the banks will have to start lending again, says Roodt. Without funding, projects just don’t happen. “It’s more important than low interest rates,” he says.

 

Private and public sector partnerships are among the quickest ways for SA to fund major infrastructure projects and underpin economic growth.

Government is to spend R70 billion to upgrade and improve some road networks in Gauteng through the Gauteng Freeway Improvement Project (GFIP) budgetted over various phases until 2018.

Friday, 29 February 2008 02:00

Gautrain to get extra R1bn from province

The Gautrain project will get an extra R1bn injection from the provincial government’s reserves to reduce its borrowing from R5,2bn to R4,2bn.

Pretoria Portland Cement Limited (PPC), on Tuesday, gave its shareholders something to smile about when it declared an increased final dividend of 166c per share from 110c previously, on good trading as a result of the construction industry’s continued demand for cement.

 

Thursday, 16 August 2007 02:00

Growth from 2010 will be sustainable

2010 Soccer World Cup Local Organising Committee is confident that the tournament will fuel long-term sustainable economic growth

Tuesday, 23 January 2007 02:00

Inner city revival outlook promising

The driving fundamentals of inner city rejuvenation appear better now than in the previous decade or two

MURRAY & Roberts Holdings, SA’s second-biggest construction company, says its order book increased as an expanding economy spurred building activity.

Page 34 of 36

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