Leveraging for infrastructure projects

Posted On Thursday, 16 September 2010 02:00 Published by eProp Commercial Property News
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To satisfy SA’s infrastructure requirements, government is slowly realising that it will have to leverage private-sector funds

Construction IndustryConstruction companies like Aveng and WBHO have both indicated their willingness to leverage their balance sheets for infrastructure projects

“In this market, we have to do more than we would normally,” says WBHO chairman Mike Wylie. Extending finance to select clients has already allowed the company to secure projects worth more than R1bn.

Aveng CEO Roger Jardine says he is looking at public-private partnerships which government is expected to announce in the areas of health, roads and prisons. “We have to look at the counterparty risk. If it suits our risk appetite, we’ll consider leveraging our balance sheets for SA projects,” Jardine says.

Power, including wind and solar technologies, and water projects would be the company’s focus. Over the next two years, he foresees R3bn worth of water-related opportunities. Aveng has also invested in technology which would be able to tackle the pressing problem of acid mine drainage, particularly in Gauteng.

Both Aveng and WBHO released their annual results to June last week.

A strong performance from its building & earthworks division helped WBHO post headline earnings per share up 8% to R17,48. Though revenue rose just 3% to R15,2bn, the company’s operating profit jumped 21% to R1,3bn.

Building & earthworks contribute 36% of revenue. The division’s sales rose just 2%, but operating profit increased by 39%, enabling it to increase its operating margin from 5,8% to 7,9%.

On the surface, WBHO’s results look better than its peers’, but only marginally, and it has been cautious about the medium-term outlook for the construction sector. Building conditions over the next 12-18 months are expected to be weak. Analysts have questioned whether the sector will be able to sustain its high margins in the current environment.

WBHO built some of SA’s key soccer World Cup-related infrastructure . It has been able to diversify its order book beyond a reliance on World Cup projects (see graph), but, like other firms, the order book is down.

Public projects have lost momentum, but the company has a pipeline of commercial developments. Roadspan, one of its recent acquisitions, has not performed as expected, Wylie says. WBHO increased its stake in Roadspan to 70% and replaced staff with its own people to revive what he says is still a good business.

Aveng posted 8% lower headline EPS at 483,6c. Revenue rose just 1% to R34bn and operating profit dropped 2% to R2,1bn.

Aveng’s manufacturing & processing division was affected by the depressed market for steel. Steeldale’s contribution to the division’s revenue fell to 38%, from 48% in 2009.

Average steel prices rose by 8% during the fourth quarter of the financial year, but dropped again thereafter. However, Jardine believes global demand for steel will recover this year.

The company’s construction & engineering division performed well. Jardine’s outlook for the sector is also cautious. The next 12-18 months, he says, with be tough, but large public projects should materialise thereafter.

The company has a substantial R7,5bn in cash on its balance sheet, and Aveng’s board has approved a share buy-back programme of up to R1bn. Once market conditions show some improvement, it intends to apply its cash to acquisitions.

Jardine says the company will not compromise its capacity by taking on projects with low margins. Competition has made margins tighter, he concedes.

But Aveng still hopes to net big government contracts. Its share of government work has dropped and 70% of the work of its construction division, Grinaker LTA, is private.

 

Last modified on Wednesday, 30 October 2013 09:51

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