Construction competition cuts margins

Posted On Friday, 20 May 2011 02:00 Published by Commercial Property News
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Despite mostly paltry results from construction companies, projects like the Gautrain, World Cup infrastructure and road building have drawn to an end.

Andries van Heerden AfrimatDespite mostly paltry results from construction companies, the mood in the beleaguered sector has begun to lift noticeably. As projects like the Gautrain, World Cup infrastructure and road building have drawn to an end, few large projects remain.

However, says Afrimat CEO Andries van Heerden, “This doesn’t mean that there isn’t work. From an investment point of view, negative sentiment about the construction industry is unfounded. Perhaps investors are looking for opportunities in the wrong companies.

In an environment where large listed construction firms have reported just as large losses, opportunities have been picked up by smaller construction companies, which are making good money.

Afrimat, a materials supplier, is one. Revenue increased by 10%, to R854,5m, for the year ended February 2011, due mainly to 19% growth within the mining & aggregates division. Gross profit rose by 13%, to R206m, resulting in a higher gross margin, at 24,1% (2010: 23,4%). Diluted HEPS were up 4% to 52,8c/share.

Management expects a gradual recovery of the trading environment in which it operates. The group acquired Glen Douglas Dolomite, a metallurgical dolomite mine, in January for R33,2m and this acquisition, together with other initiatives, should drive volumes higher in the period ahead.

Van Heerden says he will consider other acquisitions but none is on his radar as there are few bargains in the market. Mining & aggregates’ activities are expected to dominate the group’s operations, while readymix and concrete products are likely to remain under pressure due to price competition.

The share is attractively priced, trading at a historical 6,7 p:e and appears to offer value at current levels. However, various analysts remain concerned about the group’s reliance on infrastructure. The share has speculative appeal underpinned by a decent historic dividend yield of 4,8%.

Analysts also feel specialist roadbuilder Raubex is a speculative investment. Though they say Raubex has a healthy balance sheet, good margins, a high return on equity and strong cash flows, they are concerned about the sustainability of the group’s performance in an industry where projects tend to be inconsistent.

The share is trading on a historical p:e of 8,1 and at 1,4 times its net asset value. For the year ended February 2011, revenue was 1% lower, at R4,5bn, and gross profit fell 16%, resulting in the gross margin decreasing from 23% to 20%. Consequentially diluted HEPS fell 26% to 239c/share.

Raubex commercial & financial director Francois Diedrechsen says the drop in earnings is disappointing but that Raubex’s performance over the year is “satisfactory” given the state of the industry.

Raubex was one of the contractors that benefited from high-margin work on the first phase of construction on Gauteng freeways. The second phase is still scheduled to take place, but Diedrechsen says the controversy surrounding tolling could affect government policy on future toll roads. He says there is still a lot of work, including large projects. What has changed is the increase in competition, which has cut profitmargins.

AltX-listed civil construction firm Sanyati is less popular among analysts.

Not only is it renowned for poor cash generation, but its results for the year ending February were poor. HEPS dropped 52%, to 8,46c, and revenue was 23% lower, at R1,53bn. The impairment of goodwill by R155m significantly affected EPS. It related to the Sanyati piling division (R30m) and the Sanyati North division (R125m) and resulted in a fully diluted loss per share.

CEO Malcolm Lobban says its disappointing results are a direct consequence of the difficult trading environment, but that the objective of identifying attractive opportunities in select countries outside SA is beginning to bear fruit, especially in Zambia and Uganda.

A growing business in the laying of fibre-optic cable in SA and beyond its borders, its recent investment in the spiral welded steel pipe industry for the water distribution market, new mining clients requiring broad infrastructural services, and its onsite performance and consequent extension of awards in the rail market bode well for its future.

Other AltX-listed building companies Erbacon and Calgro M3 reported results recently, and were a mixed bag. Civil engineering firm Erbacon reportedan operating loss of R80,7m, from a profit of R94,4m previously. HEPS dropped from 45,10c/share to a lossof 33,36c/share.

The company, like most in the construction sector, is trying to reduce its reliance on public-sector work. But the slow pace of private-sector capex projects has not helped.

Property developer Calgro M3, however, reversed its losses. It posted headline earnings for the year to February 2011 of R17,1m, from a R9,7m loss in the previous period.

A number of Calgro’s new projects broke ground after delays. The successful completion of a housing development and a slight change of focus to privately funded components of developments contributed to the loss reversal.

Both companies have initiatives in place for future growth, but investors should wait and see if any of it is realised and is sustainable.

Source: Financial Mail

Last modified on Friday, 28 June 2013 01:11

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