Construction companies are counting on the government’s multi billion-rand spending programme in infrastructure projects to see them through the lean economic times caused by the global credit crunch, which has seen work from the private sector dwindle.

The global economic meltdown has created a lot of uncertainty for construction companies, most of which saw private sector work decline towards the end of last year.

A number of private sector clients of construction companies have suffered cash flow problems due to the financial crisis, which has affected certain projects.

From the second quarter of last year, the construction sector has been severely downgraded by the stock market on fears of a recession and depleted future work opportunities.

With commodity prices plummeting in recent months, the mining sector, which provides a big chunk of work to several construction companies, has scaled back on capital expenditure.

However, with the government reiterating that it will not put the brakes on its infrastructure spending programme, construction companies will be seeking more exposure to this public sector investment.

In his medium-term budget speech last year, Finance Minister Trevor Manuel said the government would continue to invest in several areas of infrastructure, including rail, roads, ports and energy in a bid to boost economic growth.

Group Five CEO Mike Upton said last week the group had a “reasonably good” order book to see it through the turmoil. “This (the order book) is quite well in tune with the public sector spending. The private sector has taken a turn for the worst, with capital spending, especially in mining, expected to drop significantly,” he said.

At the end of June last year, the group's one-year order book stood at R8,5bn, which it said at the time reflected its strategic positioning in the public infrastructure cycle with a mix of 65:35 in favour of public works.

“We are not negative at this stage but cautious.

“Our projections are not the same as last year, and we are not seeing the same security of work as we did six months ago. We have seen a number of projects from private sector clients that have been curtailed in recent months due to the credit crunch.”

WBHO CEO Louwtjie Nel said with work from the private sector drying up, the company was shifting emphasis towards government projects.

He said whereas two years ago the split between public and private sector work was about 20:80, that split was now about 50:50.

“We were traditionally focused on private sector clients, but we are now swinging in a big way towards government infrastructure work, such as roads, energy and hospitals — which should get us through 2009 quite comfortably.

“Beyond that, nobody really knows what is going to happen,” he said.

Nel said the group’s civils division was feeling the pinch the most as work, especially from the mining sector, had almost dried up.

“But overall we are now getting well exposed to government spend.”

Murray & Roberts said its outlook for this year had not changed from what it was in November when the group reported that it had been forced to restructure its operations in the light of the global credit squeeze.

The group said then that it had delayed or suspended some of its projects as some of its clients felt the pinch of the credit crunch.

“There are a number of significant public works and other strategic opportunities in the group's domestic and international project pipeline that are likely to proceed and which will provide stability through the difficult times ahead,” it said.

JSE-listed construction company Group Five yesterday reported a strong performance for the year to June, despite tougher trading conditions in the second half of its trading period.

It was able to ride global stock markets turmoil, higher interest rates, a weaker rand and load shedding in the first half of the year thanks to a buoyant construction sector and its product and geographic diversification strategy.

“Against these factors, we believe our strategy of balancing our portfolio of businesses in targeted geographic spread where we have strong markets in African resources and high-growth economies in the Middle East made us much more resilient to the turbulence than before,” said CEO Mike Upton.

The group said revenue rose 16% to R8,9bn from R7,7bn in the previous period, while operating profit before fair value was up 62% as Group Five shifted its focus from private to larger public sector infrastructure projects and consolidated its operations abroad.

Fully diluted headline earnings per share increased 70% to 398c from 233c in the previous year. Disposal of its 3,5% stake in a highway in Hungary had resulted in the fair value adjustment of R111m, the group said.

Cross-border operations, including activities in the Middle East and eastern Europe as well as the rest of Africa, accounted for 34% of total revenue with the rest being generated locally.

Overall operating margin before fair value adjustments improved from 5,1% to 7,1% after all costs, and cash generated from operations rose to R1,8bn for the year to June.

Upton said the results reflected the group’s continued shift from a “pure contractor to that of a diversified construction services, materials and investment group with product and geographic diversification”.

The construction division remained the group’s largest revenue contributor, turning over 79,5% of total revenue and 60% of operating profit. The group reported a record 12-month construction order book of R8,5bn, a growth of 76% from last year, while the current total order book stood at R14bn.

Construction materials and investments and concessions respectively contributed 7,7% and 6,5% of total group revenue and 22,3% and 8,4% of operating profit.

“The construction market, especially in SA, is very healthy and likely to remain so for the foreseeable future in the key sectors in which Group Five has strategically positioned itself,” Upton said. “The opportunities in the order book provide us with the scope to choose higher-margin contracts, improve cash-flow management and maximise our allocation of resources.”

Internationally, Upton said the group would continue focusing on African resources and power markets and continued growth in eastern Europe and the Middle East.

In SA, it would pay particular attention to public sector spending in such areas as low-cost housing, infrastructure public-private partnerships, power generation, roads and water.

“The group has a clear strategy and a balanced portfolio of business diversification aligned to the markets we serve. Given this, we expect to continue on our growth trajectory next year, with strong earnings,” Upton said.

Construction company Group Five said yesterday it would continue to focus on margin improvement, increasing real returns and cash generation by picking contracts carefully and monitoring risk closely as it moved into bigger, multidisciplinary contracts.

CEO  Mike Upton said the group was in a solid position with its one-year order book reaching R7bn and its total secured construction order book at R14,1bn.

“Our results reflect the work we have done to balance our portfolio of core businesses, our competence in securing and executing large, multidisciplinary contracts in key sectors, and our mix of geographies in our areas of operation.

“Only the construction division put a damper on otherwise great results, but this was due to competitive imports,” Upton said.

Revenue grew 12,2% for the six months to December, to R4,5bn from R4bn in the previous first half.

The investments and concessions division contributed 7,5% to the group’s revenue and 9,3% to its operating profit. This was obtained mainly from the group’s operation and maintenance of toll roads and returns on its equity positions in concessions.

Revenue from property developments went up 37% while operating profit more than doubled at R13,8 m.

The manufacturing division was the only disappointment, contributing 7,1% to the group’s revenue and 6,9% to operating profit. But Upton said it was on track to recover and improve margins. The division’s operating profit fell 48,5% to R19,4m from R37,8m, resulting in operating margin percentages dropping from 14,5% to 6,1%.

Construction materials contributed 7,4% to group revenue and 26,3% to operating profit with revenue up R334,3m, generating an operating profit of R73,6m and a 22% margin, which was in line with expectations. Cash and cash equivalents for the period increased R360m to R989m, compared with an increase of R60m for the year to June.

Upton said acquired businesses of Quarry Cats, Sky Sands and Bernoberg Milling contributed to group earnings

The construction division, which consists of building and housing, civil engineering and engineering projects, continued to be a star player, contributing 77,9% to revenue and 57,5% to operating profit. Group Five is migrating resources from the building and housing sector to mega contracts that encompass all construction disciplines.

Construction revenue remained unchanged at R3,5bn, although operating profit rose 80% from R89,2m to R160,7m.

Coronation Fund Managers analyst Dirk Kotze said the results were good and came in as expected, although manufacturing was disappointing.

“This is a company in an expansion mode with plans to acquire more businesses. The positive thing about it all is that all but one division are doing well and cash flow is excellent,” Kotze said.

Group Five's strategic refocusing was reflected in its solid set of results for the year to June released on Monday.

The group's revenue increased 31,1% to R7,7 billion from R5,9 billion last year.

Most significant was the strong growth in profitability, especially the group's achievement of a 5,1% margin.

According to CEO Mike Upton, this was achieved by the group's focused strategy of building a balanced portfolio of businesses across the construction sector and a particular focus on improving margins in its main business, construction.

The group also replaced the revenue and margins of its disposed businesses, Vaal and DPI, with higher-margin businesses in the materials sector.

The construction sector has evolved, requiring companies to develop expertise beyond basic construction to increase capacity to take on larger and more complex contracts from inception to completion.

The group has a clear strategy and three core revenue streams across construction, investments and concessions, and manufacturing and building materials.

Upton said yesterday the group saw organic growth in investments and concessions and the rationalisation and acquisition of materials businesses as the route to improved margins and sustainable performance.

With the group's one-year order book at R4,8 billion and capacity of about R7,3 billion, the strong market provides significant scope for Group Five to choose higher-margin contracts.

With a new strategy that is meant to ensure a balanced business mix, the group can expect to achieve further earnings growth in the 2008 financial year.

Group Five's competitors have also seen growth as the R100 billion a year construction sector continued grow, with Murray & Roberts announcing that its order book had increased to R22 billion in March this year, up from R15 billion in December last year.

Wilson Bayly Holmes-Ovcon started this year with an order book of R5,3 billion.

Construction company Group Five has won a R1,8-billion contract from Transnet to widen Durban's existing harbour by 100m and to increase the depth by 6m.

Working with Belgian company, Dredging International, Group Five Civil Engineering is responsible for the civil portion of the contract, valued at R1,1 billion.

Transnet group chief executive Maria Ramos last week announced the state-owned enterprise's plans to spend R78 billion on expanding South Africa's rail, port and fuel pipeline infrastructure over the next five years and this amount is likely to grow as more projects get the go-ahead.

Group Five's managing director of the civil engineering operations, Andrew McJannet said: "We are very pleased with this contract, which was won against international competition. We believe our previous marine civils experience, such as the Moma Jetty in Mozambique and the dry bulk terminal jetty in Richards Bay, played a role in us being the winning bidder."

Group Five's partner on the project, Dredging International, has dispatched a hi-tech dredger capable of moving 5000m of rock and silt an hour from Belgium to achieve the 7-million cubic metres that will be moved over the next two years.

"This is the third major contract in Kwazulu-Natal awarded to the group since the beginning of 2007. We have already started on the 2010 Durban soccer stadium, in consortium with WBHO and Pandev, and have signed the contract for the R6,8 billion King Shaka Airport, in which Group Five is the lead contractor for the Ilembe Consortium - which includes WBHO and the KZN Empowerment Group," said Group Five's chief executive officer Mike Upton.

Work on the harbour has started, with the demolition of existing land structures and the establishment of a pre-cast concrete yard close to the site where the blocks required for the contract will be cast.

The contract is due for completion in May 2010

JSE-listed construction and engineering firm Group Five was keen on snapping up “two or three” more quarrying and aggregate businesses, in the near future