South African construction firm Aveng is disappointed by power utility Eskom's decision to abandon its nuclear project, its chief said.

Sunday, 14 September 2008 02:00

The science of getting lucky

There is nothing like a bit of success to get chief executives deciding that they would like to speak to the press, after all.

Roger JardineRoger Jardine, who made history in 1994 when he became South Africa’s youngest director-general at 29, became chief executive of construction group Aveng two months ago, when its share price had tanked to R50 and things weren’t looking great. He gave his secretary firm instructions not to allow the media, or certainly this newspaper, anywhere near him.

Fast forward to Monday last week. The share price had recovered almost R20 and Jardine was basking in the glow of a strong set of results and a bursting order book.

Now, about that interview, asked his publicist.

Which for me raised an old question. How much are good results down to the chief executive and how much merely a matter of the company being in the right industry at the right time?

“Somebody once said you must never mistake luck for genius,” responds Jardine with a dry chuckle.

The question could be asked of any listed company with operating subsidiaries, he says.

“It depends on what goes on at the centre, generally elevated from the day-to-day operations.”

But if there’s a world cup round the corner, stadiums to be built and contracts lining up to be signed?

CEOs would soon be in big trouble if they just signed willy-nilly, he says.

“Things like managing risk are more carefully scrutinised than they would be if you were just chasing the next contract.

“There are a number of areas where head offices play a constructive role.”

Risk management is one of the most important.

“If that flies out of the window, all sorts of things can go wrong.

“When we are about to put in bids on major contracts we look at contract risk, execution risk, political risk.”

Execution risk?

“If you take on a big job, can you do it? Will you be able to deliver on what you promised?”

The biggest potential constraining factor for Aveng, “given the amount of work in the pipeline”, is capacity, he agrees.

“You have to make sure you have the people to do the job, and, if you don’t have them, where are you going to get them from?”

It is no secret that the construction industry is short of engineers, and Aveng is no exception.

“There is a shortage of skills,” says Jardine. “But there’s a package of measures you can put in place to make sure you attract and retain people.”

Offering new challenges to your engineers and other specialists is essential.

“When you win a big mandate, people are attracted to that. You attract people from elsewhere. That’s why it’s important for companies to win big, prestigious contracts.”

On this score, Aveng is doing well.

“Our order book is currently sitting at 123% of this year’s revenue,” he says, although the only projects he can name off the top of his head are Soccer City, the Port Elizabeth stadium and the new Heineken brewery on the East Rand.

Of course, his competitors are also getting big, prestigious contracts to entice a limited pool of bright engineers and keep them happy.

“That’s why you have to be on top of the game when it comes to winning the war for talent,” says Jardine.

Keeping the contracts coming is just one of the battles.

“We need to give people a sense of belonging, and to be proud of working for Aveng.

“We spend a lot of resources on testing the mood of our people, and investing in them through training and development (R30-million in the past year).

“In addition, you need to make sure that people are feeling properly compensated for their investment in the business,” says Jardine.

For qualified artisans, engineers, surveyors, project managers — you name it — South Africa should be their oyster right now.

But schools and universities are not producing the required skilled people.

Fifteen years into the new South Africa and Jardine’s skilled workforce is still overwhelmingly white. And that is not, as the employment equity commission would have it, because of racist recruitment policies.

Like its competitors, Aveng invests big money and resources, at schools, universities and through in-house training programmes, to identify, nurture and develop black skills. Nothing less than the sustainability of the industry depends on it, says Jardine.

But the skills are still not much in evidence.

As the former director-general of the Department of Science and Technology, Jardine knows better than most why not.

“We don’t have a culture of science and technology in society at large,” he says.

“We have to look at promoting a culture of science where, from a very young age, children can aspire to be great scientists one day.”

Where are the science museums, he asks? Where are the libraries to provide access to the kind of reading that might fire young minds?

How much money is going into our research institutions?

“There’s a whole chain of things that we need to pay attention to.”

Jardine, 43, grew up in the decidedly unintellectual environment of Riverlea township, south of Johannesburg, and became a physicist.

“The way I decided that I was going to be a physicist one day was that when I was at high school I opened the Sunday Times and there was an article about a black physicist. That was the first inkling I had of, hey, wait a minute, physics is open to me. I think role models are very important for young people in pursuing these careers.”

After matriculating at Woodmead school, in the northern suburbs of Johannesburg, Jardine went to the university of the Witwatersrand for a year and then won a scholarship to study in the US. He got his BSc and MSc in radiological physics but practised only “very briefly” at a medical centre for cancer patients before returning to South Africa in 1992 to work at ANC headquarters and become a civil servant.

A waste of scarce resources or what, I ask?

“There was debate when I came home that some in the ANC felt I was wasting my education. But I felt very strongly that I wanted to be part of rebuilding South Africa. I was very passionate about being part of those who were preparing for the democratic stage of our country.”

After leaving government, he ran Kagiso Media and Kagiso Trust Investments for eight years. When the chairman, Eric Molobi, died Jardine moved on.

“I was very close to him, he was a mentor to me. His death caused me to think about my own path in life and I thought I needed a change.”

Aveng approached him.

“I liked the idea that it was infrastructure at the interface between where you develop people and where you develop the economy as a whole.”

Engineers are a politically conservative bunch, so how was the culture shock, I ask?

Don’t talk to him about culture shock, he says. He went straight from Shell House to the former national department of education. Aveng was a cinch.

“One of the good things about engineers or people in this industry is that they’re very straight talkers,” he says. “That is something I took notice of, but I find it refreshing.”

His first celebratory lunch with one of his teams was at a pub.

“It wasn’t in a fancy restaurant somewhere. I think that’s refreshing.”

 

Friday, 08 August 2008 02:00

First Heineken brewery for South Africa

A R549-million contract to build Heineken’s first brewery in South Africa has been awarded to Grinaker-LTA, part of the JSE-listed Aveng Group.

Construction IndustryThe construction firm’s building and civil engineering business units are undertaking this project in a 50 / 50 joint venture, explains contracts director Richard Amm.

The 70 000 m2 brewery in Randvaal, South East of Johannesburg, will comprise production buildings and cool cellars, as well as a bottling and distribution warehouse for Heineken SupplyCo (Pty) Ltd, the brewing and distribution company for beer brand Amstel. A fast-track construction programme will see the building works completed in June 2009, Amm says. “The programme is very tight as process contractors are required to be given access to each building and sections of each building on sectional completion dates.”

The buildings at the brewery are generally concrete, structural steel and brick structures, with steel roof sheeting on all buildings.  Some 30 000 m3 of concrete will be used in the project, together with 3 500 tons of structural steel and two million bricks.

Amm notes that Grinaker-LTA will be using local labour wherever possible, and a community liaison officer will be employed to help source workers from the surrounding areas.

 

Friday, 04 July 2008 02:00

Taking Stocks for future

One of the top three or four construction companies in SA within the next few years — that’s the target status for Stefanutti & Bressan (S&B), as a sequel to its impending R1,1bn acquisition of unlisted Stocks Limited. Competition commission approval is expected by the end of July.

Willie MeyburghS&B has a market capitalisation of R2,4bn. When it listed in August last year the issue was 21 times oversubscribed. After going in at R12/share, S&B has traded as high as R27 but dropped in recent months to around R15,50.

In a joint statement the companies said the merger would position the enlarged group “as a major competitor in the first-tier construction sector, with almost R5bn turnover and 8 000 employees”, and it is not seen as a cost cutting exercise.

Stocks Building Africa was launched in 2001, after the old Stocks & Stocks was taken off the exchange as a consequence of some tough times. Management bought out what was left.

S&B CEO Willie Meyburgh says S&B heard that Stocks was interested in listing again, and that S&B had convinced the company that throwing in its bulk with S&B was the smarter move.

The industry in SA is dominated by a few large companies in terms of capacity. At the top are Murray & Roberts and Aveng subsidiary Grinaker-LTA; in the second tier are Group Five and Wilson Bayly Holmes (WBHO); and the smallest of the traditional big five is Basil Read.

There is not much competition in the top two tiers, and this allows these contractors a lot of leeway when it comes to negotiating price.

“We would like to be in the same league as the Group Fives and WBHOs, and in time get to the level of M&R and Grinaker,” says Meyburgh.

“We need to upscale to be able to take on the larger projects on our own, so that we can keep more of the margin for ourselves. It will also raise the profile of the company.

“Our competitors know the name Stefanutti & Bressan, but investors and the public in general don’t really know the company or the quality of the company.”

Before embarking on this deal, S&B had wanted to diversify itself geographically. “We said we wanted to get into first-class emerging markets such as Dubai or Abu Dhabi,” says Meyburgh.

The transaction entails a swap of about 40m shares, while Rand Merchant Bank — a substantial shareholder in the unlisted Stocks — will be paid R382m by S&B for its stake.

S&B already has a strong offering. The group is well established in civils (concrete structures such as bridges) and construction. It is also exposed to mining, which is expected to continue investing in new capacity. S&B builds and maintains slimes and tailings dams, and is involved in contract mining for open pit mines.

The group also has well-established building divisions in the Western Cape and Gauteng, with a smaller presence in KwaZulu Natal — where Stocks has a strong presence.

The deal may have come at a good time for Stocks, as a slowdown in building is expected after consecutive interest rate rises.

It will be up to the Stocks team to take advantage of the Gulf area, where petrodollar-funded building activity appears to be isolated from global economic pressures. Stocks has a handful of small joint ventures operating in three of the Arab emirates, which S&B are hoping to be able to leverage off into larger contracts.

Perhaps the biggest and most valuable gain for S&B is an experienced team of managers with a strong entrepreneurial flair. Gino Stefanutti, S&B’s founder and chairman, says: “People have asked us, ‘Why are you buying a building company?’ but we say that this is mainly a construction company. For example, if you look at the work they have done at Cape Town airport, the parking lot — it’s a civil's job. These people can be returned to civil's any time,” says Stefanutti.

“The beauty about Stocks is that they are owner-managed. They were all part of the leveraged management buyout — they are just like us. We get on well. Like us they are contractors and not professional managers.”

With more bodies on board, S&B will be able to staff the stream of larger projects that it expects to win tenders on. Government has committed itself to spending about R515bn over the next three to five years, with more work likely to follow.

Meyburgh says the group has a vision of reaching turnover of R10bn within the next three years. A double-digit operating margin is also being pursued.

Though the Stocks acquisition will dilute operating margins slightly (7,2% in financial 2008), it will be earnings-enhancing. The value of the merger will only really make itself felt in February next year. At that point there will have been at least seven months of Stocks trading in the numbers.

On a forward p:e of 12 for S&B, it seems the market is missing out on yet another trick. Meyburgh says the company is going to perform better than its forward p:e would lead one to believe, emphasising that at these levels there is a lot of value to be had.

 

Tuesday, 13 May 2008 02:00

Aveng appoints new CEO

Construction company Aveng has appointed Roger Jardine as its new chief executive.

Wednesday, 12 March 2008 02:00

Civil engineering powers ahead

While the residential and nonresidential construction market is heading for slow growth this year because of higher interest rates, the civil construction sector is expected to grow 33%.

Construction IndustryLocal construction companies stand to benefit from the boom that is expected to carry on until at least 2015, influenced largely by governmental infrastructure spending of R560bn over the next three years.

Coupled with this is Eskom’s R1-trillion budget to build power stations, Transnet’s building of railway lines, ports and fuel pipelines, and private sector expansion programmes.

Strong demand and rising commodity prices are also driving expansion in the mining sector, which will benefit the construction sector.

According to Reserve Bank data, the value of construction works reached an estimated R46bn last year, a 32% increase in real terms from R34,7bn in 2006.

South African Federation of Civil Engineering Contractors (Safcec) economist Pierre Blaauw says the estimate is an annualised figure, with the final number due at the end of this month. “Turnover this high was last seen during the construction boom in the 1970s, when the industry recorded a figure breaching the R40bn mark for the first time,” Blaauw says.

“Safcec’s numbers indicate growth between 25% and 30% for the civil engineering industry alone last year.”

He says the good news is that spending on the government's R560bn infrastructure budget started only last year and that this year and next should see further growth for the industry.

“We expect a 13%-16% increase in civil engineering industry turnover this year. It may sound small compared to last year’s record number, but this comes off a higher base,” he says.

Despite challenging macro economic conditions, infrastructure spending is steaming ahead, which bodes well for the industry, which has experienced 80% growth in turnover since 2004.

Blaauw says infrastructure spending is a prerequisite to maintain economic growth.

Blaauw says the biggest challenge the civil engineering industry will face this year will be capacity constraints. Companies will need to increase their capacity by acquiring new capital assets, locating and securing the necessary skills, buying up smaller firms, and expanding their education and training budgets.

Most big construction companies are already at work on projects such as the Gautrain, stadiums, and upgrading of airports and ports.

The likes of Murray & Roberts, Aveng and Group Five are either part of infrastructure development programmes or are bidding with international groups to build power stations and big projects.

Cadiz African Harvest portfolio manager Rajay Ambekar says gross fixed capital formation had peaked at about 30% in 1976 but has since been coming down to the current 15% of gross domestic product (GDP). “The target is 25% of GDP,” Ambekar says.

International construction companies are partnering with local companies that are unable to cope with the load and lack expertise, especially for big projects. “No South African company can build a power station on its own. A lot of civil construction would be done by local companies while technical expertise is brought by international companies,” Ambekar says.

However, he says there is a risk of delays that are outside companies’ control, which could be costly. Blaauw agrees, saying there will be more supply-side constraints than demand-side constraints.

According to Statistics SA, the construction industry showed the biggest jump of all economic sectors in acquiring capital assets from 2005 to 2006, recording a 73% increase. Salaries and wages rose 16,6%. Blaauw says it is likely the industry will have doubled in size between 2004 and next year. .

In 2006 there were four large international construction firms registered with the Construction Industry Development Board, rising to 11 last year.

“We are likely to see a further increase in competition from abroad over the next two to three years, as well as from smaller companies growing into larger firms able to compete for bigger contracts.”

 

Tuesday, 12 February 2008 02:00

Aveng interim EPS, HEPS seen 40%-50% higher

Construction group expects earnings and headline earnings per share for the interim period to December to be between 40% and 50% higher than the same period a year ago

Construction company plans to return R3,5bn in cash through a share buyback facilitated by Rand Merchant Bank

Monday, 10 September 2007 02:00

Aveng HEPS up 100%

The focus on capacity building across the Aveng Group is illustrated by the expansion in capital expenditure

Sunday, 08 July 2007 02:00

A Holcim distribution for Aveng

Aveng can expect a bonanza in September when the company releases its results for the year to June

Page 5 of 10

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