High five for in­fra­struc­ture spend

Finweek English Edition - - Companies & Markets - NICOLE REGO nicoler@fin24.com

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

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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.

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