Foundations look a bit soggy for construction sector
Government talks about R800bn being spent on infrastructure, but where in the blazes is it?
The South African construction industry continues to experience extremely tough conditions. There is not nearly enough work to sustain it and no new large-scale projects are on the horizon. There is consolidation to simply stay alive, the most recent example being the announcement that Murray & Roberts and Aveng are exploring the possibility of merging operations.
There are some very worrying signs on the construction front. Government talks about the massive sums of money being spent on infrastructure in SA, usually throwing around figures of R800-billion. However, if those kinds of funds were indeed being spent, the order books of South African construction companies would be far healthier than the meagre levels at which they sit, and even casual observers would be aware of pervasive construction activity.
It also appears that SA is finally reaching saturation point as far as new shopping malls are concerned. And when the current flurry of activity in the Sandton CBD ends soon, most of the buildings in that area will be brand spanking new and are unlikely to be torn down and rebuilt any time soon. Additionally, the mega-civils projects such as Medupi and Kusile power stations are now starting to reach their logical end-game phase.As far as the traditional players in this exceptionally tough sector are concerned, WBHO is widely regarded as being by far the best. It has a competitive differentiator, being able to operate appropriately in both good and bad cycles, resulting in a track record which is far less volatile than most of the large construction companies in SA. It can better manage its projects and tailor resources to existing and future work, is constantly on top of developments, and gets the buy-in of local communities where it constructs.
But even this high-quality operation isn’t finding it easy and is increasingly having to rely on work from its Australian business, with its Probuild operation now a tier 1 player in that construction industry. There is no evidence of complacency, and management has guarded against being greedy as it moves into this new geography. There is plenty of infrastructure work available there, but despite this WBHO has restrained itself and avoided becoming greedy, as that is when things can go horribly wrong.For the interim period to December 2017, total revenue rose by 17% to R18.1-billion, with Australia generating 61% of revenue, compared with 31% from SA and balance from the rest of Africa. Operating profit increased by 8% to R510-billion, and at this level, SA is still the dominant force, contributing 53%, compared with 28% from Australia and 19% from the rest of Africa. It sub-contracts in Australia, which explains why margins are lower there. Rest of Africa margins are set higher, given the significantly higher risk profile of projects in these countries.
While local political sentiment has improved immeasurably since the ANC elective conference in December 2017, it has not yet metamorphosed into tangible benefits on the local infrastructure front. Although Sanral is issuing road-related contracts, very little else is emanating from government. And the Sanral work is conditional upon some extremely onerous BEE-ownership requirements. For example, the requirement that a bidding contractor be at least 51% black-owned is extremely difficult for a JSE-listed company to comply with.
WBHO is one of the few profitable players in the construction industry. But its local order book will only keep it going for the next 18 months, after which gaps will appear. The private sector is still trying to figure out what is happening in the real economy before making large-scale capital commitments. Pleasingly, the rest of Africa appears to be over the worst, with commodity prices having picked up considerably.
On around a nine times historical price earnings ratio WBHO is cheap, but the share price is unlikely to do much until there is far greater transparency on South African infrastructure spend and its allocation.
Chris Gilmour is an investment analyst.