Construction sector promise remains

Posted On Friday, 26 March 2010 02:00 Published by Commercial Property News
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The boom times may have gone but there is still value in the construction sector, with infrastructure spending underpinning order books.

Construction IndustryPublic corporations are not spending, Construction order books are healthy

Despite work for the soccer World Cup drawing to an end, construction firms are still looking ahead with strong order books.

The sector’s forecast work — projects that it intends bidding for — looks promising, but competition for tenders has risen substantially. Future work in SA is partly dependent on when government — mainly public corporations — will kick-start capital expenditure programmes. Private-sector investment is off to a slow start.

The big five construction firms, Aveng, Murray & Roberts, Group Five, Basil Read and WBHO, have posted mixed financial results because of the effects of the recession. But with healthy balance sheets and an eye for acquisitions, the outlook for the sector is still strong.

Aveng, which specialises in infrastructure development, posted a 29% drop in operating profit to R686m for the six months to December. Revenue dropped 5% to R16,8bn and headline earnings dipped 33% to R638m.

Its manufacturing & processing segment was most affected by the decline, reporting a 30,6% drop in revenue to R3,4bn. The drop in steel demand and prices has hit the company’s margins.

Aveng’s Southern African construction & engineering segment was its best performer, increasing its operating profit 49% to R249m.

CEO Roger Jardine says Aveng has a number of projects in other countries in Africa and it hopes to grow this footprint. Over half of its work in Australia is made up of public infrastructure, showing the sector’s vibrancy, and that order book is 15% higher.

Aveng has a R32,7bn two year order book. Its pipeline of projects that it will tender for over the next few years is R102bn.

The company has also been able to free up cash of R3bn, a 33% increase from June last year. Jardine says it will acquire companies that will grow its emphasis on power and water infrastructure. He suggests Aveng would consider taking equity positions in power projects, like Eskom’s R142bn Kusile power station.

Basil Read, which released its year to December results this month, has an order book of R8,1bn. Road construction, which has shown healthy growth, makes up about 40% of its work.

It reported a 34% rise in turnover to R4,7bn and 33% increase in operating profit to R408,8m. Headline earnings per share rose 25% to 333,12c. Basil Read also hopes to increase its footprint in Africa, the Middle East and Australia.

Analysts say that while Aveng looks fully priced, Basil Read is cheap. And it performed better than expected, says Afrifocus Securities analyst Anashrin Pillay Though earnings are expected to decline marginally in the 2010 financial year, its stock offers potential. “Valuations still appear attractive and the share is our preferred entry into the roads market,” says Pillay. He expects a contraction in diluted headline earnings per share of about 4% during 2010. Trading on a p:e of 3,8 puts it in an attractive position.

The timing of government’s new projects, which are part of its R846bn infrastructure rollout programme, is a big concern for the industry. Private and offshore work will sustain earnings, but margins are unlikely to hit the highs seen in recent years. Still, the sector is not without promise.

Last modified on Saturday, 14 September 2013 18:16

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