Friday, 18 September 2009 02:00

Aveng costs and competition

Aveng faced a collusion probe earlier this year, now it is cited as one of the accused in a further competition commission probe into the construction industry.

Friday, 04 September 2009 02:00

Construction upside

Construction company results and higher steel demand show infrastructure is proceeding and will help the economy recover from the recession.

Wednesday, 26 August 2009 02:00

Stringent client demands fulfilled at Ngqura

The construction contract for Transnet's new administration building and accompanying facilities at Coega's Port of Ngqura has been completed by Grinaker-LTA, a subsidiary of the JSE-listed Aveng Group

Friday, 21 August 2009 02:00

Looking out for new markets

There are indications that recovery may be on its way for some companies in the construction sector, but how strong will it be and how long will it last?

Construction IndustryA year ago, construction companies had thick profit margins and a seemingly never-ending line of large projects in the offing. They had geared themselves for what the most optimistic executive may have seen as an era of perpetual growth.

The credit crunch in the latter half of last year abruptly removed the rose-tinted glasses. Suddenly companies found themselves in cost-cutting mode and were trying to assess if their order books were as strong as they had thought.

Looking at recently published results and trading updates from a number of construction companies, indications are the sector is in a healthier state than previously thought. Numbers for the 2010 financial year are expected to be good. Group Five, for instance, increased revenue by a healthy 36%, to R12bn, and operating profit 25% to R797m for the year to end-June.

This does not mean the wider malaise in the economy is not affecting the sector. Aveng warns that headline earnings per share will be 20%-25% lower for the same period.

The sharp drop in commodity prices at the end of last year hurt construction companies like Aveng, which makes steel products.

But despite such knocks, companies have mostly adapted well to the new environment by cutting costs, says Rhynhardt Roodt, an analyst with Oryx Investment Management

Group Five says it has restructured its steel operation to cope with the new environment. “It is the right size for a market that is a little weaker,” says CEO Mike Upton

Besides the fall in commodity prices, the drying up of project financing has not helped, as it has effectively reduced the pool of projects and led to the cancellation of some — even in rich regions like the Middle East.

In Dubai, Murray & Roberts (M&R) and Group Five have seen the cancellation of projects valued in the billions of rands. “We did not think national projects would be affected. We were taken by surprise,” says Upton.

Group Five lost a R4bn project and moved quickly to cut overheads. South Africans were repatriated and contracts with foreign workers terminated. But it helps that 90% of the value of this project was replaced with new contracts in SA, says Upton.

The cancellations in Dubai do not mean there is no life in the construction sector in the Middle East. More than US22bn worth of contracts has been awarded across the Middle East since the beginning of the year to July 24, says business intelligence website MEED

Despite the disappointments, SA companies operating in the region still believe they have a future there. M&R had nearly R15bn erased from its order book. But on the upside it has signed a R4bn deal to build a hotel in Abu Dhabi. Group Five’s order book for civil engineering in the region stands at R590m.

The worst seems to be over in the Middle East but, despite a recent rally in construction stocks, concern about the longer-term health of construction companies is about how they would manage in an environment that may have lower economic growth than what they have become used to over the past few years.

The order books of companies might be full for the next 12 months or so, but what might happen after the infrastructure for the soccer World Cup is completed is spooking investors.

This is why the valuations of companies in the sector are trading at a relatively low p:e. The sector’s overall p:e is only 7,86 and the construction index is down from a high of 84,13 points a year ago to 50,3.

The latest research on the sector backs this view. The FNB civil construction confidence index dropped from 60 in the first quarter to 48 in the second.

The deterioration in private-sector fixed investment in mining, manufacturing and property development is given as the reason for the drop in the index.

The construction sector is not blind to the challenges — it foresees not only tougher competition but also more irregular patterns when it comes to awarding contracts. “It could get a little lumpy out there,” says Upton.

With fewer tenders on the table, margins are expected to become a lot slimmer and Roodt says he will not be surprised if a few unlisted companies go under.

Upton, however, is confident his group will continue to do well and says there is about R70bn worth of work out there that the company is interested in. A large portion of this work comes from government’s R800bn infrastructure development programme.

Bidding for more government work during a recession might seem like an obvious move for construction companies but it does not come without risk. First, government is not a prompt payer and, secondly, there is concern over the state’s capacity to generate funding for these projects.

Upton points out that Group Five is also looking at other areas of growth, like building business in other African countries. He says that some mining projects that were initially cancelled when metal prices collapsed last year are now going ahead.

The struggling economy can also foster a better environment for mergers. Basil Read and the mining-focused TWP announced last week that they were in merger talks. Roodt says merging in the current climate is smart because whatever costs arise from the deal can be dealt with while the economy is still weak.

But for the industry to really get its wind back, the banks will have to start lending again, says Roodt. Without funding, projects just don’t happen. “It’s more important than low interest rates,” he says.

 

Monday, 15 June 2009 02:00

Mandela Bay stadium wins over critics

Construction of the Nelson Mandela Bay Metro Stadium has been completed on schedule, and it will host its first British and Irish Lions match.

Wednesday, 11 March 2009 02:00

Aveng eanings up 43%

Aveng has reported a 43% increase in headline earnings per share to 244.4 cents for the six months ended December 2008 from 171.4 cents a year ago.

Thursday, 12 March 2009 02:00

Prototype prison close to completion

The construction of the new medium security correctional centre at Kimberley is nearing completion. The facility will provide accommodation for 3 000 adult male offenders

Construction IndustryContractor Grinaker-LTA, a subsidiary of the JSE-listed Aveng Group, has announced that it’s on track to handover the prototype prison in July this year. The firm’s R821-million construction contract is being undertaken in a joint venture with BEE company Keren Kula construction.

The contract has created significant employment opportunities in the area, with 1 400 people employed on site at its peak. Of these, 140 are ex-offenders, reports Cyril Kitching, senior contracts manager at Grinaker-LTA Building Inland.

Situated on Griekwastad Road, 1 km outside Kimberley, the prison features a design that’s planned to serve as a model for other new correctional facilities in South Africa. “The design is based on the focal point of the layout being the 10m wide ‘street’, which serves as the main corridor for the movement of people and the transportation of goods,” Kitching explains. A central control room is situated in the middle, to monitor this thoroughfare, with additional control rooms at each end of the “street”. Various buildings are situated on either side of it, including medical and education facilities, bakery and textile factory, a vocational training centre, multi-purpose hall, kitchen, laundry, social workers’ units and segregation unit.

“The 12 accommodation blocks and three recreation centres are situated behind these buildings, on both sides of the street,” states Kitching. Visitors’ and administration buildings, stores warehouse, offices and a garage for state vehicles also form part of the complex. Sports fields are being established.

Kitching says that the buildings are generally reinforced concrete structures with brick walls. Roofs are timber or structural steel with sheet metal covering and concrete roofs over secure areas. The prison complex comprises buildings totalling more than 41 574 m2 in size.

In addition to utilising local labourers, sub-contractors and suppliers wherever possible on this contract, Grinaker-LTA also offered a special HIV/Aids awareness programme in which all workers participated. In addition, the contractor worked with the National Youth Service and Training Programme to offer training and employment opportunities to youngsters aspiring to work in the construction industry. A total of 98 youths were trained in plumbing, electrical, carpentry, masonry and painting. The current labour force on this contract consists of 1 287 workers, of which 870 are from the local community and 149 are women, Kitching reports. “We make use of 31 subcontractors, which range from independent subcontractors and domestic subcontractors to nominated subcontractors doing specialised work such as electrical and mechanical installations. A huge number of suppliers are being used, most of which are local enterprises,” he concludes.

 

Thursday, 26 February 2009 02:00

Tribunal confirms Aveng consent order

Aveng has agreed to pay an administrative penalty of R46 million as well as develop and implement a formal compliance programme.

Record order books are expected to help construction stocks maintain decent earnings growth in the new year, but beyond that the future is uncertain as the global credit crisis eats up future work opportunities.

Construction IndustrySouth Africa‘s big-four construction firms boast a combined R120 billion order book, thanks to the phenomenal sector growth in the lead-up to the 2010 Fifa World Cup, as well as developments in other markets.

While these order books will certainly build up construction groups‘ coffers, the global economic slowdown – which is expected to deepen next year – may open floodgates of project cancellations and delays.

So, while “the outlook for next year is pretty decent, future work opportunities have been reduced”, says one analyst, who declined to be named.

Already Murray & Roberts, the country‘s largest construction firm, has had to adjust its books after its Trump Tower joint venture in Dubai was suspended, wiping R3,2-billion off its R61-billion order book, although the firm landed a R6-billion contract to build a terminal at Dubai International Airport shortly after this.

Underscoring predictions of the tough trading conditions ahead are union claims that Murray & Roberts is planning to axe workers as the rough trading environment restricts its ability to expand.

Group Five disclosed in an interview that there “had been a small and immaterial reduction” in the number of projects in the African mining sector and that “one small housing project” for a mining firm had been cancelled.

Eskom has also terminated the procurement processes for the proposed multi-billion-rand Nuclear-1 power plant project.

Aveng and Murray & Roberts were in two separate consortiums bidding to build the power plant, with Aveng saying the termination was “understandable” and that it had confidence in the continued infrastructure roll-out in the markets in which it operated.

“I don‘t think we have seen the last of these project cancellations and delays,” the construction analyst said.

Project flow from the mining sector is expected to worsen in the new year, with Group Five having already seen a slowdown in African copper mining.

Mining companies across the world are cutting back on production as weakening commodity prices bite into earnings, with Anglo American and Anglo Platinum expected to slash capital expenditure in half when they announce revised spending plans next week.

Together with public sector spending, construction companies also based their original rosy 2009 outlooks on “continuing demand for commodities”, which was expected to spur expansions in the mining sector, although many miners are now cutting back.

Aveng has downplayed the impact of the global crisis, saying its project pipeline remained strong, but it is “taking longer for clients to finalise projects”.

For the next few years the sector is banking on South Africa‘s multibillion-rand infrastructure spending, but if the national treasury is unable to raise funds offshore to counter shrinking foreign capital inflows it may need to reprioritise its spending plans.

South Africa is spending R600-billion over the next three years to upgrade and build new roads, power generation and transmission, rail, ports, pipelines, hospitals, prisons and schools.

Another analyst said the fact that Eskom – which accounts for the bulk of the infrastructure package – had to shelve its nuclear project suggested that even governments, albeit to a lesser extent, were feeling the pinch of tighter credit lending.

“Those with no exposure to public sector spending are in for a rough time,” the analyst said.

But all big-four construction companies are comprehensively exposed to this multi-billion-rand package, with Murray & Roberts saying it will drive annual growth of 15% to 25% through to at least 2014.

 

Top JSE-listed construction companies Aveng and Murray & Roberts were removed from the JSE Top 40 index of blue chip companies.

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