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Esor struggles point to creaky construction industry


Esor struggles point to creaky construction industry

The Esor, Aveng and Basil Read sagas could a sign of some short-term capitulation, say analysts

Andries Mahlangu

Struggling construction group Esor could soon be facing a moment of reckoning in its 13-year history as a listed entity, with cash constraints casting a shadow on its status as a going concern.
Esor is being squeezed on several fronts, including costly contracts that dragged it into a steeper loss in the year to end-February, in another episode that shone a spotlight on the battling construction and engineering industry.
Recently, Basil Read filed for business rescue, while Aveng is the subject of a takeover bid by competitor Murray & Roberts (M&R), signalling that the industry may be due for consolidation.
The government has cut back on spending on infrastructure to maintain fiscal discipline, leaving a gaping hole for companies that rely on it as a source of revenue.“The construction sector is one of a cyclical nature. Following the 2010 World Cup, we have seen the sector going through a contractionary phase,” IG SA senior market analyst Shaun Murison said. “The Esor, Aveng and Basil Read sagas could be an indication that we are seeing some short-term capitulation.”
Esor, which operates in SA and other parts of the continent, racked up a loss of R306.9-million in the year to end-February, from R140-million previously.
The other factors that Esor said weighed on its performance include increasing delays in contract awards, postponements and cancellations on existing work, unforeseen work obstructions on certain contracts, generally slow payments and bottlenecks on all public sector projects.Esor had a cash-flow and liquidity crunch in the review period, which necessitated a R42.5-million bridging loan from major investor, Geomer Investments.
Markets took notice, pushing the share price down as much as 40% to record lows of just 6c on the JSE over the past week. This marked the worst weekly percentage drop since May 2014.
Still, Esor has a 4.6% free float, according to Bloomberg data, meaning the share is not highly tradable. Free float represents a portion of shares held by public investors. Geomer Investments holds 54% of the shares, according to Bloomberg data.Capicraft Investments portfolio manager Drikus Combrinck predicts further consolidation in the industry, arguing that the boom of the 2010 soccer tournament resulted in spare capacity. “I’m surprised that investors have chosen to follow their rights in the case of Aveng to give it a new lease of life, which should last for a little while.”
Share prices of Aveng, Basil Reid and M&R have done poorly on the market since their peaks in 2008, with WBHO the only big construction stock bucking the trend over this period.
“WBHO is perhaps a better-looking company within the sector with good exposure to operations outside of SA and a generally healthier looking order book,” said Murison.

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