Where’s building’s sweet spot?

TIMES: THEY ARE MOST CERTAINLY GETTING TOUGHER

Group Five and Aveng have suffered loss-making contracts resulting in margins below zero for some of their larger divisions, says Craig Shapiro

SA’s construction industry is tough and competitive with listed contractors struggling to generate returns. Nevertheless some indicators show there are pockets of growth.

Obsidian Capital’s Craig Shapiro, investment analyst, says big contractors’ building and civils order books “look challenged”. On a year-on-year basis Group Five reported in December an 18% reduction in its order book and Aveng a 13% reduction in its SA order book, Stefanutti Stocks a 3% reduction, and WBHO a 13% reduction in its Building/Civil engineering order book, he says.

Shapiro says private fixed investment continues to decline with the low business confidence in SA. “As a result building plans passed by the private sector is starting to trend downwards.” Public fixed spending, although fairly resilient, has been focussed on smaller projects versus traditional mega-projects which big contractors used to enjoy. “These smaller projects are being awarded to smaller unlisted and empowered contractors rather than the big listed contractors.”

Shapiro says another effect of the large project scarcity has been the margin squeeze experienced by some larger contractors. “With tenders becoming increasingly competitive, contractors are being forced to reduce pricing on projects. This has resulted in razor thin margins on some projects, as well as the risk that potential mishaps on projects are not accounted for in the pricing which would result in problem and loss-making contracts.”

In contrast to the slow building and civils market, however, “there seems to be quite a lot of activity in roads and earthworks, where Sanral is quite busy.” In this area, Raubex and WBHO are benefiting, he says.

According to the South African Forum of Civil Engineering Contractors (SAFCEC) Safcec State of the Industry Q2 report, road construction contributed almost 48% of industry revenue in Q1 2017.

The strong road construction market has also benefited construction material suppliers and companies like Afrimat and Raubex continue to grow, Shapiro says.

Earthworks’ activity has also been boosted by higher commodity prices, resulting in increasing mine related work for some companies. “WBHO’s order book reflects the benefit of more mining related work off a very low base.”

Contractors are being forced to reduce pricing on projects.