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.

 

Friday, 27 June 2008 02:00

Stadium workers want bonuses

Unions are seeking a R1500-a-month "project bonus" for all workers at Cape Town's Green Point 2010 stadium site, regardless of whether construction targets are met. They believe the bonus should be paid even if the workers go on strike.

Construction IndustryThis has emerged from the proceedings of an arbitration hearing held under the auspices of the Building Industry Bargaining Council (BIBC).

In an advisory award handed down this week, arbitrator Jacobus Koopman said the Labour Relations Act "clearly precludes the applicable unions from striking over matters bound by the collective agreement" -including the bonus.

The three-year agreement between unions and employers he referred to, which was reached in the BIBC, covers wages and conditions of service.

Green Point and other 2010 stadia under construction in other provinces have been dogged by strikes.

This week workers at the Mbombela stadium in Mpumalanga who were dismissed following a strike over wages allegedly burned a truck, motor bikes and a mobile office on the construction site.

A strike at Green Point in September last year led to losses of about R1 million a day.

Koopman's award followed an application brought by the National Union of Mineworkers and the Building Construction and Allied Workers Union against the Murray & Roberts/WBHO joint venture contracted to build the Green Point stadium.

The unions represent some 35% of the just over 900 workers on the site, the rest of whom are not unionised.

The unions complained that the employers had refused to negotiate at site level over a union proposal for a R1500 a month "project bonus" for all workers, not linked to productivity, and a R15 an hour wage increase.

The increase would be a 90 percent hike in their wages.

BCAWU organiser Eugenia Peter maintained in the arbitration hearing that the workers should get the proposed bonus even if they went on strike.

As the stadium superstructure is due to be completed in September, this would mean an additional R6000 for every worker.

In his submissions to the arbitrator, the joint venture's advocate, Colin Kahanovitz, said the workers were already being paid a performance-linked incentive bonus.

Although an agreement for a "project bonus" had been concluded after a strike at the Durban stadium, the payment of that bonus had also been linked to the achievement of construction targets, he said.

The employers had argued that the unions' application was "frivolous and vexatious".

"The main purpose of these hearings seems to have been to allow the unions involved to show their members that they were prepared to try to do something in order to cultivate membership," Kahanovitz said.

Koopman said in his findings that the unions believed that if the matter remained unresolved, it would ultimately give them the opportunity to embark on a protected strike.

But he found that the unions at the Green Point Stadium had no right to demand negotiations at a site rather than a bargaining council on remuneration issues.

He said he had decided not to make any costs order.

"The relationship between the parties is at a delicate stage and a costs order may exacerbate tension," he said.

 

Tuesday, 18 March 2008 02:00

Municipal strike mayhem

More than a hundred striking Nelson Mandela Bay municipal workers spent the night behind bars following a day of chaos which included intimidation, vandalism of municipal buildings and disrupting construction at the 2010 World Cup soccer stadium.

Construction IndustryAmong the 110 people arrested on Sunday was SA Municipal Workers‘ Union provincial chairman David Toyise, who is at the centre of the strike after being dismissed by the Nelson Mandela Bay municipality in January, as well as Samwu branch chairman Nomvula Hadi.

The workers‘ actions – which included throwing down what is believed to be poison in the Eric Tindale and Brister House buildings, vandalising and flooding the Murray & Roberts building, trespassing on the 2010 World Cup stadium building site and halting work there for two hours, as well as barricading the main street in Despatch – has been condemned by the municipality.

The problems started on Sunday when striking members amassed outside the Eric Tindale and Brister House buildings, threatening and intimidating their colleagues who wished to work, with weapons which included knobkieries, shamboks and steel pipes. The Herald also noticed some protesters armed with knives.

One faction then forced their way into both of the major administration buildings, threatening those who were in the offices and forcing them to leave.

Municipal manager Graham Richards said doors, furniture and office equipment, including computers, were smashed.

“Basins were stoppered and taps left running for the purpose of flooding the buildings, while foul smelling concoctions were poured throughout the buildings, causing further damage.”

Richards said the office bearers of Samwu were witnessed taking the lead in this destruction.

The Herald saw extensive damage to the adjacent Murray &Roberts building, where taps in the bathrooms and kitchens from the 4th to the 12th, as well as all emergency fire hoses, were left running, flooding the building.

Municipal documents and general litter was strewn across the floors of the three buildings, while a poisonous smell filled the lifts and passages.

Strikers were also openly hostile towards the media, threatening to beat them and ripping pages out of a journalist‘s notebooks.

A municipal contractor in one of the buildings, who only gave his first name as Moses, said he had inhaled some sort of airborne substance while using a lift in Eric Tindale.

“I immediately started feeling ill and dizzy so I warned a security guard at the door,” he said.

Moses said he rushed home and started vomiting, and his mouth and eyes were dry. He was later told the substance was considered dangerous and he should seek medical assistance.

Protesters then continued to toyi- toyi in Govan Mbeki, waving their weapons in the air and chanting, until members of the police‘s crime combating unit arrived. The protesters then dispersed in a convoy of taxis, which descended on the 2010 stadium, chanting and singing freedom songs.

Port Elizabeth police spokesman Captain Sandra Janse van Rensburg said they used bolt cutters to gain access to the stadium through a locked gate, and disrupted work for at least two hours.

She said the crowd then returned to Brister House at around 3pm, where they began intimidating members of the public, prompting police to respond.

“Police had to deploy three stun grenades, and used rubber bullets and pepper spray to disperse the crowds,” she said.

With the first grenade, striking workers fled in all directions, the police close on their heels, while others collapsed to the ground, shielding themselves from the trampling feet of their fellow strikers.

One woman, who refused to co-operate, was pepper sprayed before being loaded into the back of a police van.

Janse van Rensburg said 82 men and 13 women were arrested and charged with trespassing on the 2010 stadium grounds.

She said the municipality had also laid a number of criminal charges against individual members of Samwu and the union itself ranging from intimidation to breaking and entering and malicious damage to property.

She said one police officer was injured when a striker attacked him with a steel pipe during the arrests.

After the commotion, Govan Mbeki Avenue was littered with personal belongings – shoes, caps, jerseys and even cellphones lay abandoned.

Despatch police spokesman Inspector Marianette Olivier said police and strikers also clashed after they threw rubbish into the main street and blocked traffic.

“The police instructed them to disperse. When they refused, 15 of them were arrested.”

Olivier said Samwu shop stewards had approached the police to try and negotiate their colleagues‘ release, while those arrested toyi-toyied in the holding cells, but their requests were not entertained.

Samwu Eastern Cape provincial secretary Siphiwo Ndunyana issued a terse statement, saying that despite the arrests, the union‘s “Blood on the Floor” campaign against the municipality would continue until their demands were met. These included the reinstatement of Toyise.

The Mbuyiselo Ngwenda District of the SA Communist Party in the Eastern Cape condemned the use of rubber bullets by the police and came out in support of the striking workers, calling on the ANC at all levels to intervene in “the arrogance displayed by the mayor, Nondumiso Maphazi, and Richards”.

The SACP called for both Maphazi and Richards to resign or be dismissed “because they do not have the capacity to lead this municipality”.

Richards, however, said Samwu was deliberately trying to mislead its members.

He accused Samwu representatives of making inflammatory statements against the municipality to the media and its members, based on the municipality‘s dismissal of Toyise.

Richards said Samwu members could not legally use Toyise‘s dismissal as a basis for the strike, which is why they then delivered a strike notice under the guise of dissatisfaction with certain amendments made to the recruitment policy.

“A strike on this basis would be a protected strike but prior to this the municipality has reiterated its willingness to meet on this issue. Samwu has, however, consistently declined to accept that invitation,” he said.

All those arrested are expected to appear in the Uitenhage and Port Elizabeth magistrate‘s court.

 

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.”

 

Friday, 22 February 2008 02:00

Construction growth to last at least to 2015

As expected, in Finance Minister Trevor Manuel’s budget, an enormous amount of money is to be spent on infrastructure.

Trevor ManuelAs I mentioned yesterday, there’s no shortage of money to help alleviate poverty and develop our economy — the problem is to manage the resources efficiently.

For construction companies — as I cited from Group Five’s results for the half-year ended December 31 — a fundamental investment problem is the difficulties in managing the awarding and implementation of contracts.

In due course, the infrastructural plans in the budget will be implemented and Group Five and other construction companies will benefit from these.

“In due course” is, of course, an elastic period of time. Even so, there is some solid evidence that the construction sector is in a growth phase that could last at least beyond 2015.

In its 2007 financial year-end (June 30) presentation, Group Five showed a chart of the market outlook for the construction sector. The chart was sourced from Stellenbosch University’s Bureau of Economic Research. The figures used were of real (inflation excluded) investment in construction works.

The chart confirms that the sector is in a five-year growth cycle. In 2003, total construction work was valued at about R25bn, which in real terms was below the figure in 1991 when it last enjoyed a growth phase.

In 1981, the peak year of previous state infrastructural growth, total construction work amounted to R40 billion. Only last year was that figure again reached.

Stellenbosch’s bureau forecast takes this figure to more than R65 billion by 2015, of which the public sector is expected to contribute R50 billion.

Five years ago, Group Five’s share price was about R5,30. Its historic price:earnings ratio then was around five, and its share price trend was boringly flat. But as the cycle sector progressively improved, the company’s turnover and profits rose and the share price responded positively.

In the 2003 financial year the company’s headline earnings per share were 120c. Last year they were 283c. The share price is now at about R51,50 — about 10 times the 2003 figure — but the historic price:earnings ratio is more than 17.

Murray and Roberts (M&R), the construction counter we hold in the Private Investor portfolio, is on an historic price:earnings ratio of more than 20. Rather than believing M&R is overpriced, there is good reason to believe that Group Five is underpriced.

My guesstimate of its forward fully diluted headline earnings per share for the financial year ended June 30 this year is about 330c, giving the share a forward price:earnings ratio of about 15,5 — a bit low relative to earnings growth expectation of about 30% 40% over the medium term.

Group Five also looks an interesting buy on the technical indicators. The share price is still in a bear trend, but the price has broken through all its moving averages. It has a count to R58, a less probable count to R63 and its resistance is around R52.

 

 

Friday, 25 January 2008 02:00

Gentlemen, start your reactors

US nuclear technology giant Westinghouse hopes its partnership with SA construction giant Murray & Roberts will give it an edge over French rival Areva in its bid to build Eskom's nuclear power stations

Friday, 11 January 2008 02:00

Gautrain leaves black contractors behind

Black-owned construction companies are spoiling for a fight with the government over the Gautrain project

Friday, 07 December 2007 02:00

Moving and shaking

Super-bullish conditions in infrastructure are supporting consolidation and organic growth in the sector, and it seems there are still attractive returns to be had.

Construction IndustryRoads & civils specialist Raubex, which listed in March this year, has made its largest move to date, gobbling up peer company B&E in a R514 million deal that will allow the company to bulk up capacity.

Aneshrin Pillay, an analyst with Afri-focus Securities, says the deal is substantial: "It's in line with their strategy to enhance their materials business and it looks to be earnings-enhancing and margin-enhancing."

B&E will slot in nicely with Raubex's aggregates and crushing operation, Raumix. The market appears to like the deal, with the share moving at least 4% on the announcement.

However, says Pillay, a deal this size does eat into the company's cash resources, and this is compounded by the fact that it has already shelled out about R160 million on capital equipment.

The transaction will be funded through a combination of shares and cash, which will see B&E receive about 9m shares (worth about R295m) and R218m in cash.

Rowan Goeller, an analyst with Macquarie First South Securities, says the transaction grows the company's fleet and skills base, and will allow it to take on more work, since one of Raubex's strengths is to "move their plant around and do crushing work for the other contracts they have".

Goeller says B&E is being bought at a historic price:earnings ratio of about 10, based on the past six months' financial performance.

According to I-Net Bridge, Raubex is trading at almost three times the p:e of B&E. The only concern raised over the deal is the dilution to shareholders, but if the deal delivers more profitable growth, shareholders aren't likely to notice.

Another company that has been moving to strengthen its market position is construction company Sanyati. It continues to expand beyond its roots in KwaZulu Natal, and with its R220 million acquisition of the Meyker Group it is now active in seven of the nine provinces.

In the six months to end-August, Sanyati acquired construction and civils companies Ruthcon and GEM. Before that it bought Hibiscus Asphalt and Mega Pile.

The group will be paying for the Meyker transaction in tranches over the next four years. The transaction is being funded through cash and shares (about 44 million will be issued).

Sanyati CEO Rick Jackson says it's likely the group will make one more large transaction so as to meet its 2012 revenue target of R2,7 billion.

Another company making moves is Protech Khuthele, which this week announced the acquisition of two ready-mix operations for R79 million.

Protech is primarily a fast-track bulk earthworks company, but chief financial officer Nellis Wolmarans says it also does some civils work.

This requires a fair amount of concrete and readymix, which the company has had to rely on suppliers for.

"In the past we have called readymix suppliers and they don't arrive the next day or the day after. Even if we place huge orders we can end up waiting for weeks, which holds us up," says Wolmarans.

He says Protech has in the past moved to make itself more efficient by diversifying its business. "We started our geotechnical laboratory for the same reason, because the labs we were using weren't keeping pace with us."

The company will also be able to diversify the service offering on contracts, as it will now have the plant and skills to take on more civils work, such as culverts and drains.

Protech CEO Gerald Chapman says the six plants the business is acquiring will boost earnings, which "should be handsomely compounded in the months and years ahead, given especially the construction industry's rapid growth".

In related news, M&R said shareholders could look forward to earnings per share that would be between 40% and 50% higher for the six months to end-December and the year to end-June 2008, than in the previous comparable periods.

Proceeds from disposals of noncore assets are likely to lift these respective performances by as much as 110%.

M&R also said it had secured a seven-year, R7 billion contract for Eskom's first new coal-fired power station, Medupi, involving steel fabrication, erection and mechanical installation.

Goeller says it is likely that construction companies will continue to deliver outstanding performances "for a while yet", as government's spending was only beginning to have an impact now.

He also says all the indications are that the private sector is starting to make available the infrastructure spending that had previously been put on hold.

 

Wednesday, 31 October 2007 02:00

2010 gets reprieve as wage talks start

Construction work at the 2010 Soccer World Cup stadiums will continue while building unions and employers negotiate a wage increase

The SA construction economy continues to grow faster than GDP and based on macro-economic commitments from government through Asgisa

Page 9 of 16

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