By Gareth Vorster

The South African construction sector has, in 2010, played out like a scene in Samuel Beckett's play 'Waiting for Godot' amid continued deferral of government infrastructure spending.

While, the undoubted story of 2010 in South Africa was the successful hosting of the Football World Cup, for the construction sector, much of that build would have been accounted for in 2009, however, the tournament provided a much needed cushion against a hard hitting financial crunch in 2009 which lagged into 2010.

In October, international credit insurer Coface said that the construction industry was facing one of the most difficult periods in the last 10 years, and was not showing signs of recovery.

Coface said that companies in the construction industry were split into two distinct sectors, the first being large corporates who deal mostly with government and infrastructure based projects, and SME construction businesses that are mostly involved with residential property construction in the new housing and renovations sectors.

"Both of these segments have been severely affected in the last year, but for different reasons," it said.

"From a large corporate perspective, many of the construction projects for the Football World Cup were completed by the end of 2009, with finishing touches such as seating, etc being completed in 2010.

"The large construction companies involved in these projects will have invoiced the various government departments by the end of 2009, and are likely to have received payment in
July, August 2010.

This is due to the extensive payment processes involved in dealing with government departments," said Coface building and construction analyst Jayson Naidoo.

Coface South Africa said it had experience with clients whereby payment for work could take as long as 6 to 9 months due to the different mandate levels within government departments for sign off.

Inevitably the construction company is paid, however the process for payment will have hindered cash flow, and as such hindered growth into new projects.

"In addition to this, many of the additional infrastructure projects government will be
implementing were put on hold for the first 6 months of 2010 while all resources were concentrated on ensuring a successful 2010 Football World Cup," Coface said.

According to Naidoo, the planning and tender process only restarted in July and as such new mega-projects such as the schools, hospital and low cost housing projects were not yet in production.

Coface South Africa said it expects the large construction companies' growth measurement to pick up in 2011 as the new infrastructure projects come on line.

"In terms of the SME construction market, the slowdown in consumer's access to credit and cash flow, along with concerns around job security, is directly related to the demand for new
houses.

"While the interest rate is favourable, the access to credit from the banking sector has remained stringent," said Naidoo.

Coface said that the improvement within this sector of the construction industry is directly related to improved spending within the consumer market.

"This market is expected to remain flat for the next 6 to 12 months, as consumers adjust to more austere market conditions," Coface said.

In July the group said that the local construction industry had been hampered by a 'wait and see' approach over the first six months of 2010.

Naidoo had highlighted governments' R846 billion infrastructure budget as a feature going forward.

Infrastructure spending on economic services, including the provision of electricity, roads, pipelines, bulk infrastructure for water and sanitation and housing, would account for 85.3%, or R720 billion of the R846 billion spend, while 11.3%, or R93 billion, of the total would be spent on social services, including schools and hospitals, he said.

Brian Peterson, underwriting manager at Coface highlighted that a slow paced theme had continued to plague the local residential and commercial property sectors into December.

"The drop in interest rates has not as yet had the intended effect on consumers. Stricter credit risk policies from banks combined with stagnant property prices, the NCA and
retrenchments have put a damper on the residential property market," he said.

"With debt to disposable income still remaining high, for developing markets at 78% compared to 45-50% for China, 57% for India and 35% for Brazil. The result is that consumers are
building or renovating very little," Peterson said.

"These elements contribute to the opinion that growth will be dependant on banks increasing their lending and increased employment."

Coface noted that a drop in revenues and cost cutting exercises had also hit the commercial property market.

"The economic slowdown has lead to this market's decline, which has resulted in a consolidation strategy for most companies. This in turn has led to conservative spending in new commercial properties," according to Peterson.

He added that the infrastructure sector had been shielded largely due to the Soccer World Cup. "The positive impact of the World Cup has been the quality of the stadiums.

" This bears well for South African companies and their people skills," the underwriting manager said.

Following the World Cup, Coface said that larger construction companies had begun the tender process for infrastructure projects still in government's pipeline. "In addition, exploration in Africa is also unveiling," Peterson said.

For big players in the sector, Murray & Roberts reported diluted headline earnings per share of 340 cents for the year ended June 30, 2010, from 675 cents previously.

Revenue at R32 billion, was down 2.2% from R32.7 billion previously while operating profit declined 36% to R1.8 billion.

Murray & Roberts pointed to an order book of R42 billion, from R40 billion earlier.

Group chief executive Brian Bruce said: "The construction sector remains muted in South Africa, which is in contradiction to the higher levels of activity we are experiencing in our international markets."

Group Five reported diluted headline earnings of 561 cents for the year ended June 2010, from 561 cents previously.

Revenue declined to R11.337 billion versus R12.090 billion mainly due to a reduction in domestic construction materials volumes and in African resources markets, the group said.

Group Five CEO Mike Upton, said: "During the year, the markets in which we operate experienced increased volatility and uncertainty, mainly as a result of the global financial
stresses, as well as due to a hiatus in South African public sector spending.

"In the year ahead, growth could well be slow. However, the group's current order book and its pipeline of opportunities support a generally positive outlook," Group Five said.

Aveng Group reported diluted headline earnings per share of 444.4 cents for the year ended June 2010 from 477.6 cents previously.

Revenue increased 1% to R34 billion while operating profit before depreciation and amortisation increased 5% to R3.2 billion.

"With a stable order book and a healthy total project pipeline as well as its multi disciplinary capabilities over a number of geographies, the Board believes that the Aveng Group is well positioned to compete successfully, in what is likely to be a difficult market, over the next year," it concluded.

"The increasing need for continued infrastructure development within SA must be realised. Once Government projects come on line, Coface anticipates some positive economic movement and unemployment figures to improve," Coface said.

Source: I-Net Bridge