Mending the construction stocks cracks

Posted On Friday, 09 September 2011 02:00 Published by Commercial Property News
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The results from large construction firms show an industry still stuck in a slump, but an increase in project activity may herald the beginning of a brighter period for the sector.

Henry Laas Murray & RobertsNew private-sector work increasing

Earnings have slumped dramatically

“The storm is mostly behind us. I’m optimistic about the new financial year. We are aiming to return the business to acceptable levels of profitability”

— HENRY LAAS

The results from large construction firms show an industry still stuck in a slump. But an increase in project activity may herald the beginning of a brighter period for the beleaguered sector.

Aveng, WBHO and Murray & Roberts recently released annual results for the year to June. Together with Basil Read, which released its interim results to June, the industry shows profits that are still sharply lower.

But large projects appear to be on the increase. Nedbank’s biannual capital expenditure project listing shows that the number of new capital projects announced by companies and government has jumped. It recorded 33 new projects (valued at over R20m) worth about R50,9bn in the six months to June. This is compared with 53 projects valued at a total of R52,9bn announced during the full 12 months of 2010.

Most projects are in the mining and manufacturing sectors, confirming construction companies’ protests that publicsector work has dropped off. Over 80% of new projects were announced by the private sector.

Mining accounted for 67% of the total value of new undertakings. The first half of the year’s largest project is Harmony Gold’s Tshepong, Phakisa and Masimong uranium project, a R15,3bn mineral beneficiation project.

Finance, real estate and business services, which have driven fixed investment activity for the past eight years, have lost momentum. Just five projects were announced in the sector.

The general levels of private-sector investment, however, are still far lower than they were at their peak in 2007. Government and public corporations like Eskom and Transnet announced only three new projects.

The concern is that faltering global growth may result in firms postponing their capital expenditure plans until there is more certainty about the sustainability of the world economy.

Construction contributed just 0,5% to second-quarter GDP figures released last week, up from 0% in the first quarter.

Executives in the sector believe it will take between 12 and 18 months for the conditions to turn. Aveng CEO Roger Jardine says the lack of infrastructure spend could be slowing SA’s growth. A substantial 82% of the group’s work is from the private sector, following the stalling of new government projects.

Aveng has used this period to position itself for public projects in the areas of power — renewable and nuclear, rail, water and steel. Mining-related activity, which accounts for 41% of the company’s work, will also remain a focus.

The group posted a revenue increase for the year to June of only 1%, but a headline earnings drop of 37% to R1,2bn. Its order book grew by 19% to R37bn.

WBHO announced that revenue for the year to June fell 2,9% to R14,8bn while operating profit dropped to R1bn. Headline earnings per share fell by 19,6% to 1415,7c/share.

Like other firms, WBHO’s margins are expected to remain low until the level of work increases enough to absorb excess capacity in the market. Mining work has helped keep the order book full. Particularly in Africa and Australia, mining work is riding on the back of demand from China and India.

WBHO’s order book rose to R16,2bn, of which half is outside SA. Privatesector work accounts for 80% of both WBHO’s and Aveng’s work, but they hope to get public-sector work, expected to be announced by government over the next two years.

WBHO has declared a dividend of 220c and Aveng 145c.

This is in contrast to Murray & Roberts (M&R), which failed to declare a dividend this year, and has been plagued by problems.

M&R’s new CEO, Henry Laas, says the group encountered “the perfect storm” in the 2011 financial year. “But the storm is mostly behind us. I’m optimistic about the new financial year. We are aiming to return the business to acceptable levels of profitability,” he says.

M&R sank into a R1,74bn loss for the year to June. It posted an operating loss of R678m from a profit of R1,5bn previously, and a diluted headline loss of 503c/share from earnings of 340c a year ago.

It has been able to resolve some of the concerns repeatedly flagged by investors and has made some progress on the resolution of major claims at Kusile and Medupi power stations. This has helped improve its liquidity.

However, its Gautrain-related claims run into billions, says Laas. M&R is a member of the Bombela consortium which is building and operating the Gautrain. Bombela has claims against the Gauteng government that relate to the release of land and other projects, though Laas would not disclose their value. It says “delay and disruption” to its work on the Gautrain forced it to incur higher costs, some of which it hopes to claim from the Gauteng government. The case is expected to be heard only in 2013.

Structural problems have also had an impact. Laas says water seepage in the tunnel between Rosebank and Park Station has delayed the completion of the project. The problem prevented M&R from meeting its contractual completion date and caused it to incur penalties on the Gautrain.

The group’s order book increased to R55bn, from R44bn.

Basil Read, meanwhile, has a number of contracts that it hopes to renegotiate in SA, Botswana and Namibia. CEO Marius Heyns says claims processes have been initiated.

The group’s revenue for the six months to June rose to R2,9bn, a 12% increase. But operating profit fell 26% to R150m, taking its operating margin to 5,1%, from 7,7%. Headline earnings per share slipped to 75,21c, from 104,34 previously.

The competition commission probe into construction sector collusion continues. Companies are hoping for a resolution by the end of the year.

The sector, though not out of the woods, offers substantial speculative appeal. It will turn the corner, but the change is only likely to reflect on company results as far ahead as 2013. For now, caution is the best course of action for investors.

Last modified on Thursday, 27 June 2013 22:18

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