South African builder Group Five said it will sell its manufacturing arm and exit some construction businesses as part of a further restructuring to address a slump in its home market.
South Africa’s construction industry has slowed sharply since the 2010 FIFA World Cup, with few major infrastructure projects awarded and those that have been approved risk being curtailed by fiscal strains.
As a result, construction firms such as Group Five, Aveng, Basil Read and Murray and Roberts are exiting non-core and loss-making construction businesses as they try to adjust to changing market conditions.
“All clusters and businesses have… been reviewed and evaluated against certain criteria to determine their alignment with the group’s revised strategy,” Group Five’s group chief executive Themba Mosai said in a statement.
“Those businesses that have a high probability of meeting or exceeding the group’s targeted return on capital will be retained.”
The group said it was evaluating multiple expressions of interest received for its manufacturing business, which makes building materials, and would sell it because it is a non-core operation.
The latest restructuring comes after Group Five said in May that it had cut jobs and split up its loss-making engineering and construction division. That was followed by a board overhaul in July.
Following the exit trend?
In construction, Group Five said it will migrate to smaller, streamlined businesses, focusing only on those that have competitive advantages in target client groups.
South Africa’s scope to invest in infrastructure has been curbed by weak public finances due to sluggish economic growth, revenue shortfalls and costly bailouts of state-owned companies.
Group Five, citing expected further downgrades of South Africa’s credit rating, which would push up government borrowing costs again, and the government’s slow and low infrastructure spending, said its “traditional construction businesses are finding it challenging to secure sufficient levels of revenue to remain profitable.”
“The group has concluded that it will exit construction businesses which the group does not see the potential to turn around on a sustainable basis and which are not core to the revised strategy,” the company said in its statement.
These businesses will either be sold or closed, reducing the group’s overheads, it added.
Competitor Murray and Roberts sold its infrastructure and building business in 2016 as part of an ongoing drive to focus on projects for the natural resources sector globally.
“The new strategy plays to our strengths, is driven by areas of opportunity by following the clients, projects and funds and represents a natural evolution of the business with the objective of ensuring a significantly more competitive offering,” Mosai said.
A deal to sell Group Five’s Investments and Concessions business to Greenbay Properties for R1.6 billion ($112 million) collapsed in October.
Group Five said the business would now be restructured into separate stand-alone clusters and the board continued to assess various expressions of interest received for it.
($1 = R14.18)