Antoinette Slabbert
5 minute read
15 Dec 2016
8:38 am

2016: Construction industry focused on survival

Antoinette Slabbert

Share prices recover on growing trend towards value investments.

Picture: Thinkstock

After largely completing internal cost cutting and restructuring to match extremely challenging market conditions, the large listed construction companies during 2016 employed external strategies aimed at survival.

The industry seems to have stabilised, although at a very low base, but some consolidation could be expected during 2017, says Elsie Snyman, CEO of construction data service Industry Insight.

With the exception of Basil Read, which saw a 39% drop in its share price in the past year, the share prices of six other listed construction companies increased by more than 30%.



Sanlam Private Wealth director Alwyn van der Merwe says local construction shares might have benefited from “a rising tide that lifted all boats” as investors worldwide moved towards value shares available at low valuations.

This trend might continue in specific sectors where there is still some value to be found, he says.

He says as the possibility of Trump-inspired reflation increases, investors will continue to focus on value shares, including those in the construction, resources and banking sectors. Trump is expected to stimulate the US economy by lowering tax and increasing investment in the economy.

Van der Merwe points out the downside risk in construction shares has decreased. Construction companies have downsized to match current market conditions, which means some of the over-capacity has been removed from the market. This could result in less competitive tendering, although better market conditions are also largely dependent on increased economic growth.

Snyman says confidence levels are still too low to inspire the investments necessary to boost the struggling construction sector. While a few bigger projects have recently come to market, it is from an extremely low level. She does not expect real revenue growth for the next two to three years.

The past year was characterised by big changes in the sector, largely aimed at survival in an extremely difficult market, Snyman says.

This includes an agreement concluded between the seven companies and representatives of government, which the industry hopes will heal the rift that has seen government by-passing them for awards in the aftermath of the bid-rigging scandal. Several companies entered into settlements with the competition authorities in 2013 after admitting their roles in widespread tender irregularities over an extended period of time.

Snyman says the industry paid a very high price for its unlawful conduct. Apart from the collective penalties of R1.46 billion paid to the competition authorities and huge reputational damages, the companies agreed to collectively contribute R1.25 billion over 12 years to a fund, which will be established for socio-economic development.

Apart from the financial contribution, the companies also agreed to far-reaching transformation. Snyman says to regain government’s trust, the companies had to demonstrate that, contrary to what government believes, they are serious about transformation.

The companies agreed to each transform to a level of at least 40% black equity or to mentor up to three emerging black-owned enterprises to enable them to sustain a cumulative combined annual revenue equal to at least 25% of each of the mentor companies’ annual revenue by 2023.

The agreement provides for the settlement of possible civil claims from government clients against the companies relating to the bid-rigging scandal, which removed some economic and reputational risk.

Aveng has since announced the sale of a 45% economic interest, in Aveng Grinaker-LTA to Kutana Construction, a women-owned emerging black construction company and subsidiary of Kutana Capital. Murray & Roberts announced the sale of 100% of its local construction and building operations to black-owned Firefly Investments.

WBHO announced an agreement with black-owned Motheo Construction Group, Fikile Construction and Edwin Construction, which will result in the three contractors collectively execute 25% of WBHO’s annual turnover over the next seven years, estimated to value up to R4 billion per year.

Unrelated to the industry agreement with government Murray & Roberts reached a settlement with the Gauteng government with regard to its multibillion rand claim and multimillion rand counter claims resulting from the construction of the Gautrain rapid rail system. This has removed considerable uncertainty from the company’s financial picture.

The industry might however have to wait another two to three years for real growth, Snyman says.

This is supported by findings in the South African Forum of Civil Engineering Contractors (SAFCEC) third quarter State of the Industry report.

The report points out that large construction firms rely on road building and maintenance for about 60% of its turnover. The report expresses concern about the South African National Roads Agency’s (Sanral’s) weakening finances as a result of consumer resistance against the levying of tolls and the possibility that the amount of road building contracts coming to market might be negatively impacted as a result.

According to the report the two-year order books of large companies has decreased by 4% amid fierce tender competition and price pressure, while late payments from clients are increasing.

Half of the large companies polled indicated utilisation levels of plant and machinery below 75%.

The report forecasts a full-year turnover contraction of 4.5% contraction in 2016, 8.8% in 2017 and 4% in 2018.

Source: Safcec State of the Industry Q3 2016

Source: Safcec State of the Industry Q3 2016

Snyman says it would be in the best interest of the whole country for government and the construction industry to rebuild their relationship. “South African construction companies are world-class. It is important to retain the capacity they have to provide the quality infrastructure we need when the economy recovers and infrastructure spend gathers momentum.”

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