Construction awaits unlocking of government spend

Posted On Tuesday, 06 September 2011 02:00 Published by Commercial Property News
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Construction companies hoping to cash in on government's R1-trillion infrastructure spending spree have been left sorely disappointed

Roger Jardine AvengAs far back as February South African ministers said modernising and upgrading SA's creaking infrastructure would cost up to R1 trillion over the next four years and that it could no longer be delayed.

But far from increasing expenditure, government spending on infrastructure has contracted.

The National Planning Commission of SA has indicated that public sector infrastructure spending has declined by 30% since 2008.

"This is concerning in light of SA being the Aveng Group's largest earnings contributor," the construction group said. 

Releasing its annual results, Aveng said its two year South African Construction and Engineering order book is now weighted 80:20 in favour of the private sector, despite that sector not materially lifting its spending.

"The National Planning Commission has identified under-investment in public infrastructure spend as a key issue affecting the growth trajectory of SA. The construction industry as a whole will benefit from the unlocking of this spend," said Aveng CEO Roger Jardine.

SA's construction industry, which avoided the worst of the global economic crisis because of big projects for the soccer World Cup, is now having difficulty recovering due to the hold back in government and private sector hold back on spending.

Growth in order books is primarily being driven by international markets.

Despite reporting a 37% decline in full year profit, Aveng's two year order book has grown 19% to a record R37 billion.

This growth, said Jardine, was being driven by the private sector with most of the growth coming from Australasian operations.

"We anticipate a larger contribution to group profit from our Australasian operations while we experience limited public infrastructure spend in SA," he added.

Currently 82% of Aveng's work in SA is from the private sector reflecting the tight spend in the sector.

The company reported a 35% fall in diluted headline earnings of 286.6 cents a share for the 12 months to end June, compared to diluted headline earnings of 444.4 cents a share a year ago.

Profit for the year declined 37% to R1.17 billion from R1.87 billion the year. The company, however, maintained its dividend at 145 cents a share.

Aveng is far from alone in reporting the difficulty of the current South African trading conditions.

Government in SA is still slow in producing an adequate stream of identified infrastructure and public private partnership work, civil engineering and construction contractors Wilson Bayly Holmes-Ovcon (WBHO, WBO) said on Monday.

Also reporting its full year results, WBHO reported a 20.1% decline in diluted headline earnings per share to 1,402.4 cents for the year ended June 2011 from 1,754.4 cents a year ago.

The company has an order book of R16.2 billion, with 50% outside of SA and 80% of the order book with private clients.

Murray & Roberts (MUR), on the other hand, managed to buck the trend by reporting an increase in earnings in its full year to end June as it made significant progress in resolving contractual claims.

The group reported a full year diluted headline loss per share of 503 cents for the year, from diluted headline earnings per share of 340 cents previously. Its order book grew R11 billion to R55 billion from R44 billion in 2010.

Group Five (GRF), the country's fifth largest construction company, last month reported a 44% drop in full-year profit as it continued to struggle with the industry-wide slump.

Fully diluted headline earnings per share of 315 cents were reported for the year ended June, from 561 cents previously. The construction order book was R8.8 billion, R4.0 billion lower than the R9.2 million in the prior year. "Last year set a high base as results still included large 2010 infrastructure contracts. In contrast, this year saw significantly diminished market activity and contract delays," said Group Five CEO Mike Upton as he summed up the state of the sector.

Group Five said that its geographic diversification would continue, particularly into Africa.

"Certain African markets offer good prospects, with the outlook for private sector fixed investment and primary infrastructure starting to improve," the company said.

This is a trend identified by credit insurer Coface SA, which said that South African-based construction firms were looking north to counteract the weak local market.

Brian Peterson, industry analyst at Coface SA pointed out that the construction industry was one of the hardest hit industries during the recession with a large number of companies going into liquidation.

In the ensuing 18 months of recovery since 2010, Coface said it had seen very little positive movement in the industry. Three elements that made up the construction industry: government, corporate and domestic spending, had been plagued by negative factors.

It said that while some government projects remained active, the greatest concern was a slowdown in the tender process for new infrastructure projects with some tender processes being delayed by up to six months.

Construction firms agree that the South African government's public works programme has the potential to create growth opportunities within the South African construction sector.

"However, the lack of certain timing will further plague the domestic construction sector's ability to plan and forecast and hence employment levels continue to decline," warned Group Five.

Last modified on Thursday, 27 June 2013 22:49

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