High five for infrastructure spend
GROUP FIVE HAS COME out unscathed after a crucial blow at its Dubai operations. It’s replaced contracts worth a full R4bn lost in the Gulf region with contracts in South Africa – an action that if left undone could have crimped its order book to R10bn.
Recently, Group Five’s Middle Eastern operations were scalded when it lost R4bn worth of projects in the United Arab Emirates’ commercial hub Dubai, which has been hit by the global economic slowdown, weakening demand for oil and the credit crisis. That’s made access to liquidity difficult, forcing investors to ditch international projects.
The loss of contracts meant Group Five had to repatriate and reassign 3 700 of its 5 000 workers in the region, most being from Pakistan and India. But it retained a core operation to support existing contracts worth R563m and to execute new work should it win it. “We’re busy bidding all the time,” says Group Five CEO Mike Upton.
But it made up for the writedowns by focusing on active markets like SA, which has a major multi-billion rand public sector infrastructure spend programme. “Tendering activity in SA’s public works market is strong, given Government’s budgeted R787bn infrastructure spend over the next three years,” said Stephen
Meintjes, Imara SP Reid’s head of research.
Approximately 80% of Group Five’s R13bn order book comes from its SA operations as a result – but there’s still more to come. Upton is still expecting a further R1,8bn worth of projects to be added to its order book in a little under a week.
Sasha Naryshkine, a market commentator at Vestact, says there’s an enormous amount of construction work over the next half decade that will prop up companies exposed to public infrastructure projects – including Group Five – during times when developed economies are in a recession. “Government has again reaffirmed its commitment to SA’s infrastructure spend, so there’s no doubt there will be lots of work to go around,” he says.
In his recent Budget speech, Finance Minister Trevor Manuel said SA wasn’t only “shovel ready” but was “already shovelling”.
“That’s positive news that we’re well into Government spending – already four years into it. So it won’t have to take time to still have to filter through,” says Sasfin’s David Shapiro.
However, Shapiro says the bad news is that, by looking at some of the share prices on the JSE, the market was ignoring what that means for SA’s construction companies. “It’s bad news that markets are expecting projects globally to come grinding to a halt. And even though we have this big infrastructure spend happening here – a major influence on SA’s construction market – I think many people are ignoring what that means.” Shapiro says in September last year Group Five’s price was at R58 and currently it’s around R28/share. “It’s lost half its value over the past five months. The question is how much lower can it go against this R787bn commitment?”
But Shapiro feels Group Five’s share price shouldn’t fall as dramatically as it had. Instead, it should actually pick up once the company realises earnings from its Government commitments. “The only place where such companies can get hurt is if they don’t meet deadlines and if inefficiencies creep in or contracts fall through. There are always those risks in construction.”
In the six months to endDecember 2008 Group Five reported a 33% increase in revenue to R6bn, a 35% growth in operating profit to R376,7m and a 36% gain in profit for the period to R240,68m. Diluted headline earnings per share increased by 59% to 230c.