CONSTRUCTION companies are likely to continue operating under pressure unless government spending on large infrastructure projects increases, says a Johannesburg construction analyst.
He was commenting on international rating agency Global Credit Rating's announcement that it has left construction group Murray & Roberts' short- and long-term domestic currency rating of A+ and A1 unchanged.
Conditions in the construction industry are unlikely to improve this year, despite low interest rates, says the analyst, who asked not to be named. "I do not see government spending on infrastructure improving (this year)."
He says the reduction in interest rates has led to a number of residential developments, which benefit small-scale construction and cement companies.
"Big companies such as Murray & Roberts and Aveng tend to concentrate on major capital projects which mainly depend on government spending," he says.
Melanie Brown, executive director of Global Credit Rating, says the strong rand has worsened the pressure on construction companies.
Murray & Roberts , led by CEO Brian Bruce, is not the only company facing difficult conditions, she says Aveng, SA's biggest construction group, reported a 67% reduction in its net income for the year ended June 2004.
"But the cycle will turn. When government starts to spend more on infrastructure, they (construction companies) will be in a better position to take advantage of that.
"There is Gautrain and the 2010 Soccer World Cup on the way."
Despite the strong rand and cyclical market conditions, says Brown, Murray & Roberts has maintained its current credit rating with the help of its ungeared balance sheet and strong cash balance. The agency's annual rating indicates the group's ability to meet its short- and long-term obligations.
She says the company has maintained a net cash position in the period under review, "although this has deteriorated over the past two years, decreasing to R682m in 2004, from R1,3bn in 2002".
In the same period, the group's total borrowings have declined by R138m to R422m, of which 67% is of a short-term nature, she says. "However, whilst discretionary cash generation has historically been strong, the group has reported significant reductions over the past two years, from R641m in 2002, to R196m in 2003 and R133m in 2004.
"Gross gearing levels declined from 23% in 2003 to 16% in 2004. The acquisition of Cementation and Clough, cumulatively amounting to almost R600m, will be funded from internal cash resources.
"As at July 2004, this reduced the group's net cash position to R97m, although, after including the proceeds from the sale of Unitrans, this increases to around R1bn," she says.
After its rebuilding over the past four years, Murray & Roberts'
performance is closely linked to the fortunes of both the domestic and global economy and, more specifically, to levels of gross fixed capital expenditure, Global Credit says.
"Furthermore, while the group's operations are geographically diverse approximately 50% of the group's order book relates to work in the rest of Africa and the Middle East difficulties and challenges operating in these markets, including unfavourable contract terms and project delays, have exacerbated business risk," says Brown .
