Construction industry: Oh for the glory days of 2010
All eyes now on fresh prospects for economic growth
Some of the major players in South Africa’s construction industry are undergoing an existential crisis. Probably none more so than Aveng, whose R53-billion annual turnover in financial 2014 has now shrunk to about R23.5-billion.
Eric Diack, executive chairman and acting CEO of the group, is candid about the problems. These include underbidding on projects amid fierce competition for tenders, bad management, poor project execution and a weak economic environment in the country.
Despite a rebound in minerals commodities and a better outlook for global growth, the group continues to produce poor results across many of its businesses. To this end, it has just concluded a strategic review that proposes selling off non-core assets and restructuring around its Moolmans mining business and the McConnell Dowell civil engineering operations that operate in Australasia.
While Aveng has resolved 20 of 24 disputed contracts in six months to December 2017, and reduced net debt to R555-million from R937-million in December 2016, gross debt of R3-billion remains. This comes mainly from previous operating losses. Construction, worldwide, is a tough business. Nearly 20% of projects become legal albatrosses around the necks of companies, while margins of between 3% and 5% are considered normal. It is also an industry that draws corrupt conduct like carrion attracts scavengers. Politicians favour it to line their pockets, as do unscrupulous contractors.Nearly all of South Africa’s big listed construction groups have fundamentally reviewed their business in recent years. Competition Commission penalties for collusion and government’s “voluntary rebuilding programme” to drive transformation in the industry have cost about R3-billion, adding red ink to many bottom lines.
Like seven other big listed construction and engineering groups, Aveng had to choose to sell at least 40% of its domestic civils and building operations to black economic empowerment partners, or mentor up to three emerging contractors for a period of seven years. It chose the former, but the cancellation of its proposed 51% sale of its struggling Grinaker-LTA subsidiary that operates in South Africa and elsewhere in Africa has shown the difficulties of transforming the industry.
Diack says this deal lapsed because the buyer, Singabakhi Holdings, previously known as Kutana Construction, failed to honour an upfront payment of R20-million after such arrangements had become unconditional. Suffice to say, the former Kutana Construction, stated that it was the “unexpected underperformance” by Grinaker-LTA that scuppered the transaction.
It also said the strategic review announced by Aveng in September 2017 had raised significant concerns about Aveng’s commitment to that business, and feared its investment would not yield the projected return.
For a moment, it looked like Cyril Ramaphosa’s ascension to the top job in South African politics would herald a new era of economic growth. That has now been dashed by the proposed support for expropriation of land without compensation.Aveng had indicated this week as it presented its interim results to December 2017, that it would now focus on becoming an international infrastructure and resources group operating in selected fast-growing markets. To this end, Diack says the group might sell 100% of Grinaker-LTA.
This sounds a lot like the route Murray & Roberts has taken. It has exited South Africa’s moribund civil construction and engineering market, to focus on global underground mining, oil, gas, power and water projects.
As part of agreement over transformation struck with the government, Murray & Roberts chose to sell 100% of its construction and civil engineering business in South Africa to a black-owned consortium led by the Southern Palace Group.
While there are plenty of potential positives to be drawn from such immense structural change to the South African industry, the biggest listed construction groups — Aveng, Murray & Roberts, and Wilson Bayly Holmes-Ovcon (WBHO) — now derive most of their revenues and profits from abroad — mainly Australia.
Murray & Roberts CEO Henry Laas says the group is not exiting South Africa, but exiting a sector. But amid volatile industry conditions subsequent to South Africa’s holding of the Fifa 2010 World Cup, Murray & Roberts, Aveng and Group Five have also been trying to shed domestic steel and manufacturing assets — not always successfully.
Aveng group finance director Adrian Macartney says the global soccer event left the industry over-capacitated at the same time that government ran out of money to finish building the Medupi and Kusile power stations on time. These projects have been wracked by huge cost overruns, violent worker unrest and legal contestation.
South Africa’s construction sector used to take up about 50% of local steel production. But the closure of the country’s second-largest steel maker, Evraz Highveld Steel and Vanadium, and a spate of massive losses at South Africa’s largest steel group, ArcelorMittal SA, show the industry is bleeding.
Despite the government having now designated structural steel for use in infrastructure development, recent ArcelorMittal SA data indicates steel used in construction makes up little more than 30% of group sales. Since financial 2016, Aveng has struck thousands of workers from its payroll, including about 2,000 permanent staff. Construction is one of the most industry-intensive employers in South Africa, albeit not on a permanent basis.