Construction sector is running out of road

Posted On Friday, 18 November 2011 02:00 Published by Commercial Property News
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The construction sector is unlikely to take much comfort from government’s National Development Plan, it states that investment in public infrastructure should be stepped up.

Willie Meyburgh Stefanutti Stocks“Roads became one of the few areas where government was spending. Now the industry is faced with a resource oversupply”

— WILLIE MEYBURGH

The construction sectoris unlikely to take much comfort from government’s National Development Plan. It states that investment in public infrastructure, by the private sector too, should be stepped up. But this seems to be in contrast to the national moratorium on toll roads.

The department of transport’s review of toll roads has become a serious cause for concern. Two years ago, these roads became one of the few areas of investment where government, through the SA National Roads Agency (Sanral), was still spending. Now, says Stefanutti Stocks CEO Willie Meyburgh, the industry is faced with a “resource oversupply”.

Contractors flocked to the roads sector in anticipation of a surge in new work like the N1/N2 Winelands toll road and the second phase of the Gauteng Freeway Improvement Project.

But these projects have been put on ice, at least for now.

Moreover, competition has caused the road sector’s margins to drop. Stefanutti, which reported its annual results to August this week, says operating margins in its roads division are down, from 12,3% to 9,6%. The company reported 6% higher revenue of R3,8bn but a 19% drop in operating profit to R179m. Headline earnings per share (HEPS) dropped by 26%.

Roads builder Raubex won’t change its strategy, says its financial director, Francois Diedrechsen But the company remains cautious. Roadmac, its road rehabilitation division — which contributes half of the group’s revenue — has been hit by the high levels of competition. The division’s operating margins decreased to 9,8% for the six months to August, compared with 15,6% in the previous comparable period. Diedrechsen says margin pressure is expected to continue in the second half of the year.

Sanral is expected to continue to invest in its non-toll network, which is 81% of the network, with money from national government. Opportunities exist in provincial roads as well.

But companies like Raubex and Stefanutti are also keeping their eyes on work outside SA.

Of Stefanutti’s total turnover, 26% is generated by its foreign operations, compared with 22% a year ago, Meyburgh says. And within two years, the company hopes to increase this to 30%.

Work beyond SA’s borders is secured at far higher margins. Stefanutti’s operating profit margin for work outside SA has increased from 30% to 35% withina year.

Diedrechsen adds that it has become more strategic, and more important, for Raubex to explore opportunities elsewhere in Africa. “In the long term, that is where the future is,” he says.

However, competition in other parts of Africa has increased. Diedrechsen says SA contractors sometimes lose out to the Chinese, but their tenders aren’t always lower.

Raubex’s results for the six months to August show a 3,7% increase in revenue to R2,61bn. Operating profit, however, is down 31,4% to R282m, while HEPS dropped 37,1% to 92,9c/share.

Protech Khuthele also reported interim results for the six months to August. Revenue was down 8% to R494,8m, while HEPS weakened to 3,8c, compared with 5,9c/share previously. The group’s operating margins also declined to 3,4% from 7,3% previously.

The group says that its focus will remain on the mining sector until private and public infrastructure work picks up. Mining infrastructure has been a source of work for most of the sector, both within SA and outside it.

Imara SP Reid analyst Sibonginkosi Nyanga says Protech’s pipeline of work, largely in mining, is not expected to change in the short term. Based on this, Nyanga’s recommendation to investors is to hold on to their shares.

With more grim results, AltX-listed B&W Instrumentation & Electrical says it has weathered its toughest year. The firm posted a R15,8m loss for the year to August. Operating margins plunged from 20,5% to 3,2%. B&W reported a headline loss per share of 7,7c, from HEPS of 28,5c/share previously.

A number of problem contracts hurt the business. The company was affected by “a severe cash-flow crisis”. Its cash balances dwindled into the red with debt of R34,5m, compared with a healthy R71m cash balance a year before. The group also failed to declare a dividend.

The crisis was caused by unexpected growth of its existing projects in Madagascar and Mozambique, which drained working capital and resources. Drawnout negotiations with clients also forced B&W to discount early payments, says CEO Brian Harley The situation prevented the company from taking on new work. But Harley says the company is now cash neutral and hopes to be cash positive by December. It is also targeting a return to profitability by the end of the 2012 financial year.

B&W, and most other construction companies, appear to be about to turn the corner. On this basis, it may be the right time to invest. Most analysts, however, are wary of more bad news, with the uncertainty over government’s toll roads programme presenting more risk.

The competition commission’s investigation into anticompetitive behaviour within the sector is adding to that uncertainty, though its extent has not been fully revealed. The commission’s invitation to companies to settle has been a way for the industry to get off relatively lightly, given the scale of alleged anticompetitive behaviour.

How the commission will administer fines is not yet clear.

Last modified on Thursday, 27 June 2013 21:29

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