South Africa's Construction Industry desperate for recovery
Monday, 07 May 2012
South Africa’s construction industry is in the midst of a significant decline - a decline which is set to continue, at least in the short term.
SA’s construction sector is still hurting from a three-year battle between companies to win work for low-priced projects. The disappointing fact is that a recovery in construction stocks has already been priced in.
The JSE construction & materials index has increased by 24% since October 2011, outperforming the industrial index by 14%. Earnings forecasts of company results, however, are still bleak , with a recovery not expected immediately.
But Standard Bank research analysts Irina Gavrilova and Luresha Mudaliar say the market typically re rates the sector 12-18 months ahead of a recovery in earnings. Sentiment about a recovery in earnings has improved on news that activity has increased sufficiently to have an effect on order books.
This year’s earnings show companies have not felt the effects of a recovery yet, however. Upcoming annual results announcements for medium to smaller firms won’t be occasions for celebration.
A trading statement from road builder Raubex says it expects earnings and headline earnings per share (HEPS) for the year to February 29 to be between 20% and 30% lower compared with the previous comparable period. This translates into a range of between 168,2c and 193,2c a share for both.
The company says its performance during the second half was influenced by intense competition for contracts and low margins in the roads sector. Shortages of bitumen, a key ingredient in the production of asphalt, compounded the situation.
Uncertainty over government policy on toll roads has also been a concern for the group. The department of transport suspended all future toll road projects last year, pending a review of the use of the user-pay principle. Raubex’s results will be published this month.
Geotechnical specialist Esorfranki, which is expected to release its annual results for the year to February at the end of May, hasn’t released a trading statement. But Imara SP Reid analyst Sibonginkosi Nyanga recommends that its share be added to investors’ portfolios on the basis of what is to come.
Nyanga says investors should focus on growth in the company’s order book and an expected increase in its margins. He says this year’s results should be better .
Meanwhile, Stefanutti Stocks expects earnings and HEPS to be between 15% and 35% lower than those for the comparative period. Nyanga rates the share a hold .
Stefanutti recently purchased Cycad Pipelines, diversifying its operations. It also announced that it had secured a contract mining project from Ikwezi Mining in KwaZulu Natal. The project is expected to be worth in excess of R1bn.
Management at all three firms have expressed cautious optimism about the prospect of a recovery.
Others are more positive. Building materials supplier Afrimat has been a star performer, despite fierce competition. Its share has performed excellently, rising 68,6% in the past year.
Such is the confidence of CEO Andries van Heerden that the company declared an early dividend in March, two months ahead of the release of its results for the year to February -- expected next week.
It announced a final dividend of 13c/share, resulting in a total dividend of 19c for the 12 months to February . This compares with a total dividend of 17c in the previous comparable period.
Afrimat estimates that profit before tax for the year to February will be between R115m and R120m, compared with R108m last year. Given that its dividend policy is three times cover (meaning the number of times the profit could have paid the dividend), the company says its dividend is appropriate.
In March, Afrimat purchased the Clinker Group, a supplier and processor of raw clinker to the concrete manufacturing industry. The acquisition will further diversify Afrimat’s business. The group says the combined strengths of its units will yield new opportunities and increase profitability.
Afrimat also assumed ownership of Glen Douglas, a metallurgical dolomite mine south of Johannesburg, last year. Its expansion of the quarry is expected to make it one of the largest in Afrimat’s portfolio.
But what does this mean for the investor? For the moment, Gavrilova and Mudaliar believe construction shares are fairly valued on an absolute basis. They advise investors to be cautious in the light of general economic conditions.
But growth in work outside SA and an increase in public-sector investment as well as private-sector projects are expected to drive future growth.
By channelling planning through the Presidential Infrastructure Co-ordinating Commission (PICC), government has stepped up its effort to unblock project delays. The commission has identified 43 projects valued at about R3,2trillion, though financial feasibility has not been established for all of them.
Speaking at a recent conference on infrastructure, deputy president Kgalema Motlanthe said government recognised that the pace of infrastructure development was lagging behind SA’s needs.
"The PICC mandate is to develop a 20- year infrastructure pipeline, to ensure that we can plan ahead and move away from the stop-start syndrome around the building of infrastructure.
"This will allow us to ensure better financial mobilisation, provide greater certainty to the construction industry, give educational institutions a framework around which to plan their skills development strategies, and to provide a roadmap for investors and communities."
How government will deal with the suspension of new toll road projects, however, is still unclear.
The private sector, which is sitting on R520bn in corporate deposits, will also eventually begin investing in capital expenditure. An increase in activity will come at higher margins, improving companies’ earnings outlook considerably. With an already large jump in order books of almost all companies in the sector, growth prospects look good.