Construction sector in dire straits

SA’S construction and engineering sector has taken such a beating that its index is now trading 69% lower than at the peak of the global economic crisis.

The gloomy picture revealed in a South African construction report by global consultancy PwC, is so dismal that it is not clear what will rescue an industry that has seen "effective growth" from 2010 to 2014 of only 2.3% per annum, not even beating inflation.

The report showed the JSE construction index had hugely underperformed the main market. In September, the index was 69% below September 2009 levels when global markets were at one of their lowest ebbs. This means five of the nine biggest listed construction firms surveyed had market capitalisations below their net asset value. In aggregate, the nine saw their market cap fall 38% to R26bn from the end of June last year to the end of June this year.

Along with structural collapses, Competition Commission referrals and "large-scale project challenges and delays", industry revenue was down 6% in the year, as overall profits nose-dived 54%, despite a 13% rise in operating cashflows.

Poor state infrastructure spend on large projects and long delays in energy-related works, such as Eskom’s Medupi and Kusile power stations, have left the industry in the doldrums.

There was a 4% decline in the total order book for the year, the first since PwC started publishing the report. This comes as the Bureau for Economic Research’s business confidence index registered a five-year low as weak demand weighed on company volumes and profits.

"There is a clear lack of confidence in the industry at the moment," Andries Rossouw, energy and mining assurance partner at PwC, said on Thursday in presenting the report.

He said that along with inflation in the cost of construction materials, public spending on large infrastructure projects had dropped in the year, mainly as Eskom progressed projects, but also because Transnet spending was predominantly focused on rolling stock.

"That won’t impact or support the construction industry at all," Mr Rossouw said.

"Public sector expenditure is not really happening in line with expectations. Meanwhile, a recent shift in public sector spending towards social infrastructure such as housing and associated schools, clinics and water reticulation, along with spending by the South African National Roads Agency, has kept some smaller JSE-listed construction companies ticking over nicely," he said.

Mr Roussow said "the largest construction and engineering stocks have found themselves out in the cold as they scrabble for more lucrative, but risky, infrastructure work in Africa and Australasia".

He said there had been substantial demand for building, but this would not recur going forward. Private sector spend on Sandton corporate headquarters had been evident in the period, but this was tailing off.

"There is a big difference between revenue and profit," Mr Rossouw said. "As it is with all construction projects, they operate at very low margins."

This massively increased risks of losses for construction firms as execution of projects had to be perfect, he said.

Ron Klipin, a portfolio manager at Cratos Capital, said on Thursday that government finances were "very tight", reflecting the slowdown in the economy.

"The big guys in construction are under pressure and will remain under pressure for some time to come."

Source: Business Day Live

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