Rolling with the punches: how construction industry survives

Business

Rolling with the punches: how construction industry survives

Raubex is scrambling to find work for its crews outside South Africa as projects have simply dried up, says CEO

Giulietta Talevi

Basil Read will not be the last construction company to go under. Though the group is in business rescue – a legal avenue to avoid liquidation – its future life, if it has one, will be vastly different from its previous and at times, proud, existence. Aveng, which a few short years ago boasted a cash moat of R5-billion has thrown a desperate last dice to raise cash; Esor, a specialist in geotechnical and pipeline work is hemorrhaging. Afrimat, until recently a resilient player in the building materials sector, has begun to post weaker earnings.And road builder Raubex, which has paid out a dividend every single year since its listing in 2007 is now scrambling to find work for its crews outside South Africa as projects have simply dried up, a lunatic situation given the country’s massive backlog in road building and maintenance. The JSE’s construction index peaked at 88.7 on October 31 2007 and it’s been downhill ever since – to the present 22.2, with former Top 40 stocks now reduced to small cap status.
Raubex CEO Rudolf Fourie explains what is going on:
There are no roadworks coming from provincial government or the SA National Roads Agency (Sanral). Now Sanral is normally quite a steady supplier of work and quite a reliable source of work but it’s not brought out any work in the last six to eight months, nothing, it’s just dried up.So what we find now, the Western Cape is the only provincial government bringing out road jobs. So we had a tender closing there today and we found all the Gauteng contractors – it was a dog show. Suddenly you find 15 competitors where normally you’d have five. That just reflects what’s going on in the market. There’s absolutely no roadworks coming out.  We’ve engaged with Sanral and we’ve tried to find out what is the status quo. The two reasons given to us are the delays with Treasury, they’re battling on the procurement side, and then on the tolls side they’re not earning toll income so they’re battling to pay their bonds.
But non-payment of tolls are only really an issue for the Gauteng Freeway Improvement Plan (GFIP)?
Yes but the problem is the GFIP bond is probably the biggest chunk of their debt. I think the long and the short is they just haven’t got money at this stage.
Of the road work that you were doing, what proportion did Sanral account for and what percentage was provincial government?
That’s the sad part. If you look at our group, the total order book used to be at 25% of our total turnover – remember that’s not just road construction – that was Sanral, and provincial and municipal was 6%. That’s down to 12% now, so it’s halved and it’s probably going to halve again because nothing else has come out.We’re working on work that was tendered more than a year ago. Imagine in three or four months’ time we’re going to have no Sanral work. Now we’re looking at other countries to supplement work which we think we’ll be successful with. The concern to me is that they can’t give us an indication of when things will normalise.
How on earth do you plan for that?
Well we’re now doing a massive rightsizing exercise because we’re running at probably 50%-60% of capacity. That’s not enough to make money on at all.
And in numbers in terms of staff?
We’re busy with the exercise but it’s going to be at least 1,000 jobs. From operators to engineers to receptionists, so it’s quite a wide spread. If you look at our materials companies that supply into road construction, they’re running at 50-60% of capacity. We’re geared up for 100% of capacity so we have to reduce that now.And what about work from provincial government?
Provincial has halved. It’s horrible.
Do you ever think this is a retaliatory tactic against “white” business, especially those firms involved in collusion in the run-up to the World Cup?
I don’t think it’s because we’re a white company because the black companies don’t have work either. It’s across the board so I don’t think it’s a white-black issue, they’re battling with the same issue. Now to me I think there is an element of lack of skills and lack of will, but it’s lack of finance. I don’t think roads is their top priority.
How do you keep your spirits up and manage this?
That’s quite a valid question because it’s quite tough. The way I view it is, there’s going to be a lot of attrition, a lot of (what happened to Basil Read) is going to happen and I think we’re in for a tough three years. Now what I’m telling my guys to keep their chin up: if you can be still standing in two years time then the environment is going to look much different: I don’t think government is going to spend more money, but there will be fewer construction companies competing. We call it the last man standing syndrome. If we can be the last man standing in two years because I think we’re in a terrible space for the next three years, I still think Raubex will be able to manage it because we’ve got mining activities, other activities, solar, that keep us going.You say that but for example Aveng, not too long ago, had a huge cash moat that investors thought would protect it. How is it then that you can keep cash in the business?
If you look at Raubex we’re fortunate enough to have a strong balance sheet but you’re so right – you can wipe out that balance sheet in a very short space of time if you’ve got a project that goes south, like Group Five had in Ghana, it’s very quick to wipe out that balance sheet so we’re trying to protect our cash because we believe we should be able to leverage off that. Fortunately, road construction is only about 35% of our business although five years ago we were a road construction company with a bit of materials. But this year, the other 65% we’re keeping our heads above water. So we should be able to survive this tough period. Government needs to start spending, we’ve had meetings now and we’re trying to tell government that.
What’s the response?
They know that. They acknowledge it. But without money, how do they do it?

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