Construction sector set to turn corner

Posted On Monday, 09 December 2013 21:47 Published by
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Business updates by construction firms show their order books have generally bulked up or remained stable.

Construction IndustryThe latest business updates by construction firms show their order books have generally bulked up or remained stable, although margins remain under pressure and the sector is yet to see any substantial new public sector work.
 
Avior Research analyst Dirk Noeth says while there was greater activity in the rest of Africa and in Australia, “local order books are still a bit muted” — although volumes differ across different market segments. Generally, he says, margins “are still depressed, specifically in general construction or building work”. Mr Noeth says while underlying margins are improving slightly, strike activity has largely offset this.
 
Construction firms have said they expect bids relating to the government’s infrastructure plans to materialise within the next 18 months. Public sector work makes up a larger proportion of smaller contractors’ order books, as new projects have tended to be relatively small.
 
Wilson Bayly Holmes-Ovcon’s (WBHO’s) order book grew 15% to R24bn during the 12 months ended June. Chairman Mike Wylie said last month only about 10% of WBHO’s local work was government related — well below previous figures of about 40%. But he expected this to increase with the state’s infrastructure roll-out. Meanwhile, in the three months ended September, Murray & Roberts’s order book declined to R41.3bn from R46.1bn, although the company said several large tenders not included in this figure were in the process of being closed. 
 
About 16% of Murray & Roberts’s order book is public-sector related, as new tender documents for major infrastructure projects have not yet been issued by the government. Group Five’s contracting order book grew 4% to R14.7bn in the four months ended October. About 36% of this is public-sector related, mostly in SA. Group Five management said last month that margins were still under pressure, particularly in the building and housing segment — where margins in the short term were expected to be at the low end or below Group Five’s 2%4% guidance. CEO Mike Upton said the South African construction market was “showing some signs of an improvement in certain sectors” although margins were still low. “We have got very little visibility from the new government infrastructure rollout, although we understand there is much more that is being done in terms of the planning of that process,” Mr Upton said.
 
Basil Read’s order book grew 20% to R12.2bn in the six months ended June. The company said in August that its loss-making contracts were nearing completion, while its order book had been secured at improved margins. In the three months ended September, Aveng’s two-year order book grew 6% to R39.8bn. Aveng chairman Angus Band said last month that stagnant infrastructure spending had led to the “continued under performance” of the local construction and engineering division.
 
Stefanutti Stocks’ order book rose 38% to R11.7bn over the six months ended August, thanks to a large mining contract and some medium-sized projects. Just more than a third of the firm’s order book is public-sector related. While Stefanutti Stocks has not taken any of the government’s planned infrastructure spend into its forecasts, CEO Willie Meyburgh said last month: “We’d like to believe that within the next 18 months or so it will start to happen.”
 
In the six months ended August, smaller player Esorfranki’s order book rose 5% to R2.2bn. Of this, 81% is public-sector related. Esorfranki’s management reported last week that tender activity in both the private and public sectors had been picking up. Esorfranki’s order book has been supported by additions to existing contracts at the Kusile power station — where the company’s total project value has ballooned.
 
Andries Rossouw, a partner at PwC, said on Tuesday that although the construction industry had undergone a “significant financial decline” following the 2010 Soccer World Cup, the sector’s future seemed brighter. Mr Rossouw said recent weakness in the sector was largely due to falling margins “as cost pressures could not be passed on to clients due to depressed public and private spending as businesses recover from the effects of the economic decline” 
 
“However, it appears that the economic cycle has bottomed out, with a number of encouraging signs from the financial performance of individual companies, order book growth and public infrastructure commitments,” Mr Rossouw said. However, there were still a number of potential risks facing the industry.

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