SURVIVING THE DESERT
You may not notice amid all the anguish, but some construction companies are doing just fine right now. For Afrimat, the secret was diversification; for Murray & Roberts, it was wholesale reinvention
In the midst of value destruction, dwindling order books, shoddy performance and a general atmosphere of despair, some construction companies are doing just fine. A common denominator is that, rather than sticking to pure construction, they diversified into sectors that offered new growth prospects.
Afrimat is one of them. It has been in business for 45 years, and describes itself as an “open-pit mining company” that also provides all kinds of building materials, including bricks, cement and industrial minerals. It also contracts out services to the construction industry.
The bottom line: during a decade when most other construction companies felt the pain of a meltdown, Afrimat’s share price rose 1,200%. Over five years it is up 140%. And it keeps diversifying. In October 2016, it got into the iron-ore sector when it made a bid for the Diro iron-ore mine (since rebranded as Demaneng) near Sishen in the Northern Cape. The mine was in business rescue at the time.
Afrimat CEO Andries van Heerden says you need to plan on the understanding that the construction industry moves in cycles.
“You need to understand the risks and act accordingly,” he says. “The starting point is to ensure that your balance sheet is not overgeared. Second, you need to ensure that you have several sources of revenue.”
Third, construction companies should aim for flawless execution of projects. “We know there have been problems of execution with some companies.” Is the industry ripe for consolidation? “We will see some acquisition and sale of assets. There are private equity players looking for assets,” says Van Heerden.
There are plenty of assets on the block too. In January, Group Five sold its manufacturing assets, Everite and Sky Sands, to a consortium of private equity companies, Trinitas Private Equity and Agile Capital, for R480m.
Murray & Roberts (M&R), which traces its roots to 1902 and which built the Carlton Centre in Joburg, the Koeberg nuclear power station and the sail-shaped Burj al Arab luxury hotel in Dubai, has already ditched the construction industry.
In April 2017 M&R sold all its civil and building construction businesses to a consortium led by the Southern Palace Group of Companies for R314m.
Spokesperson Ed Jardim says: “The infrastructure and building platform transaction was consistent with our intention, set out in the new strategic future plan, to exit the civil infrastructure and general building sector through a first-of-its kind empowerment transaction in this industry.”
Southern Palace is a 100% black-owned holding company, founded in 2002 by Sello Mahlangu. Says Jardim: “We exited the infrastructure sector completely and no longer do any building or civil construction work in SA.
The former Murray & Roberts Construction business was rebranded as Concor.”
M&R now focuses mainly on three sectors: oil and gas; power and water; and underground mining.
Jardim says there is still long-term demand for natural resources, which bodes well for his company.
“These drivers include global population growth, urbanisation and economic growth, as well as environmental concerns, that are stimulating investment in water security and clean energy sources.”
It’s hard to argue with the numbers.
Over the past three years, M&R’S share price has rocketed 47%, and most analysts now rate it a buy.
That’s rare love that you’re not seeing in the construction sector right now.