Small business enterprises making profit in construction

According to latest financial statistics released by Stats SA (P0044), total turnover in the construction industry increased by 26% y-y in nominal terms during the 2nd quarter of 2015. This information is surveyed from a sample of 5000 business enterprises across all sectors in the economy, excluding financial intermediation, insurance and government institutions.

Results of this survey are used in compiling estimates of the Gross Domestic Product (GDP). It also serves a proxy for trends in investment in the construction industry, including details pertaining to a breakdown by income, expenditure, inventories as well as profit. 

Another advantage is that the survey allows for a breakdown by firm size, clearly showing the gradual deterioration in the contribution by larger firms from over 60% of total turnover in 2012 to 41% by June 2015. The contribution by medium size firms has been relatively stable, hovering at between 20% and 22%. Contribution by smaller-sized firms showed robust growth from 16% in 2012 to 39% by June 2015.

Clearly the burden of work is shifting from the big to the smaller firms. Thus, in rand terms, turnover by smaller firms is on par with turnover earned by the larger firms. This trend is in line with government policy to stimulate SMME’s in construction, but may come with a set of challenges. Larger contractors generally invest more into capex and employment while smaller firms tend to invest less, particularly in employment, skills development and training. Employment may also be more volatile as it tends to fluctuate on availability of work.

The analysis:

  • Total income (turnover including interest, dividends, royalties, profit and other income) increased by 0,1% on q-q basis. A 8% increase was reported in smaller firms, while both medium and larger firms reported negative growth rates of -10% and -1,3% respectively
  • Profitability improved in the 2nd quarter, supported mainly by an increase in the profitability of smaller firms where margins averaged 8% in Q2. In rand terms this equated to R3bn. Medium size firms also recorded solid profit, averaging 9%, but this equated to R1,7bn, while larger firms reported weak profit margins, averaging just 0,9% in the Q2, or R369m in rand terms.
  • R1,7bn was spent on hiring and leasing of plant equipment, mostly by larger enterprises (contribution 64%, or R1,1 bn). Smaller firms spent less than 0,5% hiring and leasing of plant equipment, medium size firms spent 2,4% of turnover, while larger firms spent 2,8% of turnover on leasing of plant equipment.
  • On average 17% of total expenditure related to employment costs. The contribution of employment costs to total expenditure by medium firms represented 21%, the highest rate, followed by 17% for larger firms and 15% for smaller firms. 

The landscape in the local construction industry is changing. The dearth in availability of larger scale projects as a result of the slow roll out of infrastructure programmes by government and state owned enterprises (SOE’s), the private sector’s unwillingness to invest accompanied by government’s policy to support the development of SMME’s  is ultimately re-shaping the industry. At what cost is unclear but diminished institutional capacity will lead to supply constraints if and when the industry finally reaches the lower turning point and starts to recover.

Source: Industry Insights

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