Construction to remain under pressure in 2010 - Fitch Ratings

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Market conditions are not expected to improve until mid-2011.

Fitch Ratings-Johannesburg/London-03 March 2010: Fitch Ratings says in a special report published today that the credit profiles of South African construction companies will likely remain under pressure in 2010, and that market conditions are not expected to significantly improve until mid-2011.

"Despite early signs of a gradual South African economic recovery, construction companies will continue to be adversely affected in 2010 by weak demand conditions, reduced order books, above-inflation cost increases, and more limited financial flexibility," says Roelof Steenekamp, Director in Fitch's South African corporates team. "Fitch expects a sustained recovery in the domestic construction sector to lag a recovery in the larger South African economy by 12 to 18 months, given the relatively long lead times associated with the planning and execution of large projects and expected delays in the re-commissioning of projects that were postponed when the economic downturn deepened in 2008."

Significant infrastructure spending by the South African Government of more than ZAR800bn over the next three to five years to 2015 will significantly relieve the revenue pressure for a number of the larger construction companies. These companies include Aveng Limited ('A(zaf)'/'F1(zaf)'/Stable) and Murray and Roberts Holdings Limited.

However, Fitch believes that notable risk exists that a portion of the planned non-essential government infrastructure spending may be postponed or deferred, given funding difficulties by state-owned enterprises (SOEs), the size of South Africa's budget deficit (expected to remain above 7% in 2010) and slow economic growth. A deferral of projects may have an adverse impact on construction companies' credit profiles and push out existing order books beyond three years, which would in turn weaken margins, leverage and cash flow in 2010 and 2011.

Fitch believes that the sector's financial flexibility will be tested in 2010. As the industry is also dependent on high levels of competitive tendering, the agency expects that construction companies will focus on conserving cash where possible by postponing or deferring non-essential capital expenditure in line with weaker demand, limiting shareholder-friendly practices (by decreasing dividends, limiting share buybacks), and actively managing working capital over the next 12 to 18 months.

The full report, entitled "South African Construction Sector Outlook 2010", is available on the agency's website, www.fitchratings.com.