Warning on SA construction shares
27 July 2012 | Sasha Planting
INVESTORS should apply a healthy dose of scepticism when considering potential returns from JSE-listed construction counters based on proposed Africa infrastructure projects, as large headline numbers may not materialise.
Although local contractors are ostensibly well-placed to benefit from plans like the Southern African Development Community (SADC) Regional Master Infrastructure Plan, they may not be the default choice for these projects, says Leith Wimble, investment analyst at wealth manager BoE Private Clients.
A SADC Regional Infrastructure Master Plan, which could involve cross-border projects with a combined investment value of up to $500bn, will be presented to SADC heads of State for official approval at a summit in Maputo in August. This follows the finalisation of the master plan by ministers responsible for infrastructure in the SADC, who met in Luanda, Angola in late June. The plan proposes the development of regional power, transport, water, communications, tourism and meteorology infrastructure over the next 15 years to 2027.
However, as investors have learnt in SA, there are a number of things which need to happen before these projects can go from the drawing board to approval and execution.
‘‘The funding of these projects is not guaranteed. For example, should the euro collapse given the prevailing economic climate, donor countries and private sector investors are likely to reprioritise their spending and infrastructure development in SADC could be left on the backburner,’’ he says.
SADC representatives will only be embarking on a capital raising exercise in 2013.
A classic example of this is the SKA project. Having won the lion share of the closely contested project, estimated to cost anything between R15bn
and R23bn, funding for construction has yet to be finalised.
The intention is that it will be funded by the SKA Organisation which has nine members. These include Sweden, Australia, Canada, China, Italy, the Netherlands, New Zealand, SA and the UK.
All of SA’s big construction companies are exploring opportunities north of SA’s borders. ‘‘Given the state of the local construction sector it would be prudent for the likes of Stefanutti Stocks (JSE:SSK), Group Five (JSE:GRF), Aveng (JSE:AEG), Murray and Roberts (JSE:MUR) and Basil Read (JSE:BSR) to tender in order to fill up their order books,’’ says HuganChetty, construction analyst with Afrifocus.
While Aveng, M&R and WBHO have focused much of their hopes for growth on the oil, gas and mining industry in Australia, at least 10% of their future projects lie in Africa. ‘‘Africa is on their doorstep, so from a capacity point of view it makes sense’’, says another analyst. ‘‘Africa is attractive because margins are higher. But many of these companies got burnt in Africa in the 90s and they are cautious’’.
Group Five is one company that has not invested in Australia and has investments in Africa, the Middle East and Eastern Europe. It is considered an ‘‘African play’’.
SA advantage up north?
However, Wimble cautions that should construction on the Regional Master Plan go ahead, local contractors should not expect to be first in line when tenders are awarded simply because they are African.
‘‘The only competitive advantage which a South African contractor may have in the rest of Africa is its existing relationships with local clients which have moved into the rest of Africa.
For example, if a SA mining group opens a mine in the DRC, there is a good chance that its local South African construction partner will be requested to provide the supporting infrastructure work like rail or civils.’’
WBHO (JSE:WBO) has successfully leveraged off its relationship with Shoprite (JSE:SHP) for instance.
Open tenders against foreign competitors could prove tricky. This is especially true given the ability of Chinese contractors to tender at much lower prices, even if it is potentially at the expense of the quality of the infrastructure and labour rights.
‘‘Chinese contractors often bid with a state bank which provides the funding for the projects. These bids are difficult to beat,’’ the analyst says. ‘‘When it comes to infrastructure development, price (and method of payment) trumps quality in the order of priorities in certain countries in Africa,’’ adds Wimble.
He says Namibia’s Neckartal Dam tender highlights the surprisingly active involvement of a long list of international competitors in the rest of Africa, including European, Russian and Indian players, which may not have been actively involved in Africa a decade ago.
Most of the construction companies will report results in August and September. Group Five was the first to post a trading update.
Though its results are a little worse than expected – fully diluted headline earnings per share will be between 60% and 70% lower than the restated FDHEPS of 310cps for the previous corresponding period – the problems disclosed were well known by the market.
On the upside, the company noted that a slow, tentative broader market recovery from the second half of the 2012 financial year has materialised.
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