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No end in sight for construction sector woes

Posted On Monday, 09 November 2015 13:51 Published by
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The collapsed pedestrian bridge on the M1 highway in Sandton is an unfortunate metaphor of what the sector is going through at present.

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It is taking weeks, if not longer, to get to the root cause of the collapse of the temporary pedestrian bridge, a Murray & Roberts project. For investors, there is another source of anxiety: years-long erosion of shareholder value. Barring a few exceptions, there are no dividends to speak of. Stocks in the construction sector are stuck in the rubble due to poor earnings results and worrisome prospects.

Despite chalking a double-digit rise in revenue (to R29.5bn), Wilson Bayly Holmes-Ovcon’s operating profit margins and headline earnings per share (HEPS) contracted in 2015. WBHO earns half its revenue from Australia, a business that is “disappointing”, admits chairman Mike Wylie. Further, despite a “healthy” order book operating profit also weakened in the unit’s building division. Overall group results were uninspiring. Also looking pale is Basil Read which, as it’s been a trend for the past decade, sways from the black to the red. Despite its much-vaunted projects in St Helena and elsewhere, the firm shed 5% on Friday to R4 per share. In 2008 it was worth R40 or 10 times the prevailing price.

Aveng, a former a beauty, has lost its spark. For the second year in a row, it incurred net losses and revenues reversed R9bn to hit R43bn in 2015. HEPS turned into headlines loss per share. The end to red-inked statements is not in sight at this firm, whose financial director, Kobus Verster, replaced Roger Jardine as CEO, last year.

“Aveng is not expecting an improvement in its key market in the short-term and will continue to focus on the recovery of underperforming businesses, resolving unsettled claims and preserving its balance sheet.” That’s what Verster’s team said of the construction firm’s prospects. Despite faring shabbily, Basil Read’s bosses seem upbeat. “The company has returned to profitability in a difficult trading environment and is on track to achieve its revised forecast for the 2015 financial year.”

Long-suffering investors would hope so. After all, it’s been years since investors in this construction firm, and most of its peers, received dividends. Flat wallets abound.

In a biting winter like this, PPC, despite its obvious weakness, seems to be viewed as hot. It’s not. For the interim period to end-March, the cement giant’s revenues rose but HEPS declined while net profit almost halved. This year’s results are due on November 17. In 2014, profits plunged despite a jump in revenues and there was no dividend declared. Still, PPC, being well-positioned beyond the Limpopo, augurs well. The continent needs US$100bn to address its immediate needs on the infrastructure front, according to Gordon Institute of Business Science’s Lyal White. Tanzania, a "virgin market" in property, according to Dar es Salaam-based Watumishi Housing Company has a huge deficit of both residential homes and commercial space.

“Most of PPC’s growth hinges off its African growth story, with new cement plants being constructed in Rwanda, the DRC and Ethiopia,” says Argon equity analyst Junaid Bray, noting that top brass politics that played itself out last year hurt confidence and amputated the stock. Such politics set the stage for then-CEO Ketso Gordhan’s on-off-on exit. “Without proper management control, it was not clear if these projects would be properly executed. The new management team has restored investor confidence somewhat, but the share price remains depressed as investor confidence in the African growth story appears to have waned,” Bray tells eProp.

In the aftermath of PPC’s boardroom politics, explains Bray, the share price halved between last September and March 2015. Despite the new team at the controls and mining veteran CEO Darryll Castle, with finance and science qualifications, the stock remains in the south. Bheki Sibiya serves as executive chairman of a talent-packed and relatively new board. Talent hasn’t helped staunch the gush. Having lost 40% year-to-date, it fetches R16.40. That drags the cement maker’s market cap to R10bn on the JSE. For context, if you bought PPC stocks for R10,000 in January you would be R4,000 poorer now.

Meanwhile, the all-share index has gained almost 10%. The Alsi has doubled since January 2010 while the PPC crashed from the R35 mark it boasted then.

PPC offers just a glimpse to the mess in the sector. The past few years, just like 2015 (for most), have seen investors’ purses getting lighter across the crumbling mortar-and-brick sector. That is in contrast to what is happening elsewhere, notably the London bourse as, says a Markit/CIPS survey, the UK’s construction industry is growing.

Of the local JSE-listed heavyweights, WBHO was the best performer last year. That’s telling because it actually collapsed 16%. Raubex, lagging the Alsi, ended 2014 on a flat note. It then went on to erode 25% since January and is now valued at R3.1bn. Worse than WBHO’s decline are sorry performances by fellow blue chips M&R (which lost 27% in 2014) and Group 5 (23%). In just a year, Stefanutti shrank 40% to end 2014 at R6.50/share. That translates into a market cap of R1.2bn. Broadly, this firm has eroded a hefty R800m in value since 2010.

M&R, another duckling whose share fetched around R50 in 2010, has destroyed much investor value to R10 or a fifth when the Alsi has powered ahead 90%. Can it get worse? In this case, your R10,000 would have collapsed to R2,000. Market cap sits at R4.5bn.

Diagnosing the poor investor sentiment, Bray refers to a “perfect storm” and cites “excess capacity and a scarcity of work”, a mixture that can only mean pressure on margins.

“In order to fill their order books, contractors have been willing to accept low-margin contracts. (That) leaves slim margins for error. Inevitably in the construction industry, things do go wrong occasionally or there are delays on a job due to strikes or adverse weather conditions. This has resulted in a significant amount of loss-making contracts, which has decimated profitability in the industry,” he tells eProperty News.

Part of the pain is self-inflicted. Aveng, M&R, Stefanutti and WBHO were shamed for their pre-2010 collusion and tender rigging, and slapped with a R1.5bn fine this year. “The relationship between government and the large listed contractors has deteriorated since allegations of collusion and anti-competitive behaviour. This has partly resulted in public sector infrastructure contracts being smaller in size and awarded to smaller, unlisted contractors,” the analyst asserts.

While 2015 was punctuated by subdued profitability and a lack of government spending on significant infrastructure projects, Bray expects a better year ahead. “In 2016, profitability is expected to improve coming off a low base and as many loss-making projects come to an end. The concern would be for profitability to improve beyond 2016 as visibility remains poor as it has been difficult to replenish order books at profitable margins.”

Last modified on Monday, 09 November 2015 14:37
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