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JSE reflects doubts about government’s infrastructure plan

Construction company share prices remain muted.
Credibility issues: concerns regarding the state's ability to deliver on its plans abound. Image: Shutterstock

A lack of confidence in the government’s ability to deliver on its promised multi-billion rand infrastructure investment plan is being reflected in the lack of any major movement in the share prices of JSE-listed construction and construction material companies.

Construction market intelligence firm Industry Insight reports that its contractors index fell by 8.1 percent in September as confidence in the government’s ability to deliver on promises dries up.

Industry Insight senior economist David Metelerkamp said there has been much hype about large-scale infrastructure stimulus and so-called shovel-ready strategic infrastructure projects over the last few months – but to date it has been all talk with very little action, apart from the recent launch of the R84 billion Mooikloof Mega City Development.

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“This is reflected in the falling share prices of contractors, as well as much worse than expected civil confidence in the third quarter of the year, according to both the FNB/BER civil confidence index, as well as the Safcec [SA Federation of Consulting Engineering Contractors] civil confidence index, with the government suffering from huge credibility issues,” he said.

Industry Insight said it created the construction results monitor service index, comprising handpicked listed companies on the JSE that are direct stakeholders in the South African construction industry, to ascertain the performance of the listed construction sector.

Raubex

The share price of Raubex, which is heavily exposed to the road building and rehabilitation market, slumped from R24.01 on September 1 to R19.00 on September 30 but has since recovered to close at R23.72 on Friday.

The recovery in Raubex’s share price follows the company reporting on October 8 that it is optimistic about its future prospects despite expecting to report a slump in earnings of between 130% and 150% for the six months to August 2020 compared to the previous corresponding period.

Raubex said the contract opportunities it has tendered for in the South African construction sector remain encouraging and reported that it was recently awarded a significant R1.48 billion 45-month contract by the SA National Roads Agency (Sanral) for the upgrade of the N3 Section 2 from Dardanelles to Lynnfield Park in KwaZulu-Natal.

This project is one of about six projects that form part of the upgrade of the N3 Durban-Pietermaritzburg corridor, which are among the 50 Strategic Infrastructure Projects (SIPs) gazetted by the government as part of the R340 billion first tranche of its infrastructure expenditure plan to revive the economy post Covid-19.

Afrimat

Metelerkamp said the construction suppliers index was down by a similar magnitude to the contractors’ index in September, and 8.2 percent lower than the previous month.

He said this index has declined despite Afrimat continuing to release good results.

Afrimat’s share price has steadily appreciated from R23.00 on March 26, the day before Covid-19 lockdown was implemented, to close at R38.45 on Friday.

ArcelorMittal SA, PPC

Metelerkamp added that, most notably, the share prices of the likes of ArcelorMittal SA and cement maker PPC declined in September, with ArcelorMittal down 20% and PPC 26.3%.

ArcelorMittal’s share price declined by a further 2.7%% in October to close at R0.35 on Friday while PPC’s share price remained stable and closed at R0.59 on Friday.

Reliance on PPPs

Marc Ter Mors, global head of equity research at SBG Securities, said there is no doubt there is scepticism about the size and speed at which government is able to spend on infrastructure because there are many influencing factors at play, including the increased reliance on public-private partnerships (PPPs).

He said PPPs can be positive in drawing in the private sector to run and build more concession projects but these contracts are quite complicated.

Minister of Public Works and Infrastructure Patricia de Lille confirmed in August the government plans to revive and increase the use of PPPs and other mechanisms, including build-operate-transfer (BOT) and build-own-operate-transfer (BOOT) project delivery methods, to draw in the private sector to deliver on government’s planned massive R2.3 trillion infrastructure investment programme.

De Lille said the government is currently reviewing the PPP legislation because it is complex and very time consuming.

Ter Mors admitted that not many “shovel ready” projects have been implemented; he is only aware of a few road contracts worth a total of R3 billion.

He said Raubex has been a beneficiary because of the expectation that Sanral will be the first state entity to have shovel-ready projects while water works projects, for instance, are more complicated and take longer to finalise.

Corruption fallout

“It’s frustrating and it is indeed true that a lot of the competencies have diminished in municipal and provincial departments where a lot of the capital owners have become politicised positions during the Zuma era.

“There are far fewer engineering competencies and some of that is aligned in the past to corruption. So when the ability of corruption is taken away, it takes longer then for that project spend to come through,” he said.

Ter Mors added that all the action plans have been put in place to centralise the decision making, preparation of projects and monitoring of projects and “we are now all waiting for that to come to fruition”.

“I can’t say that will happen in the next three months. I think it will be gradual and therefore the market may be sceptical and disappointed, but you will see an increase tenders.”

Ter Mors said the bottom line is that for civil survival, infrastructure spending and job creation is so important that President Cyril Ramaphosa will need to make it happen.

“There therefore can be disappointments in delays but I don’t think there will be disappointments in the ultimate delivery of these infrastructure works coming to the market,” he said.

A matter of timing?

Peregrine Capital executive chair David Fraser said the share prices of most companies have not yet priced in any of the benefits of the government’s infrastructure expenditure plan.

Fraser said Afrimat is an exception because its share price is just off its all-time high and 40% of its earnings are now from iron ore – but it is certainly a construction materials and aggregates company, and the infrastructure plan is one of the drivers of its share price.

He added that Raubex’s share price is seeing some benefit from the infrastructure plan because of contract awards and the growth in its road construction and rehabilitation order book.

But Fraser believes investors are correct to be somewhat sceptical about the infrastructure plan.

“There is a healthy dose of scepticism about the government’s ability to execute on the whole list. We know it’s not going to happen, but if they get 20 to 25% of that number we are in for some fireworks.”

Fraser said there is almost a need to analyse the list of projects on a project-by-project basis. He added that Sanral is capable of delivering its projects, but doubts that they are all “shovel ready”, adding that these are the projects that Sanral put out to tender last year, has almost adjudicated, and just needs to award.

He said that if you start looking at the other projects, it is a bit of “pie in the sky”.

He believes there is a lot of upside in the sector that should be reflected in the share prices of companies that will benefit from the infrastructure plan, but the market is saying right now that it’s not going to happen.

“Government does not have the money or expertise to manage these things,” he said. “That is what the market telling you right now.”

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Not surprised at all. The ANC has all the plans but haven’t implemented one successfully! All they care about is how much they can pocket for themselves…

I suspect that is how these “PPP’s” will work. Like the REIPPP’s, Eskom buy the power at an inflated tariff, the financiers, developers and shady BEE “partners” all walk away with plenty of loot. Think Gautrain; executives get wealthy, subsidised by taxpayers.

ONLY IF this ANC govt realises that an economy is built (incl. construction) by allowing for a truly FREE MARKET / and LESS interference into the private/business sector.

You have to free up the private sector & create conditions for business & investor confidence.

Then govt can sit back and watch on economy grow without spending a cent of their own money.

(but politically, this is a waste of one’s breath)

What are you buying when you buy a South African construction company? What is the fundamental driver of the profit potential of the business? What is the basis of the profit margin? In a free-market society, the rule of law, property rights and the validity of contractual agreements form the basis of economic activity. We are not a market economy. We are a collectivist, socialist to be more specific, society where the state plays a central role in the economy. The state is the central planner that directs all the resources to where they believe it will serve their purpose. Socialism is not the rule of law, it is the rule of man.

Who is the state? The lovely voter in his mud hut, or shack, in the township, is the state. When you buy shares in a construction company in South Africa, you are buying into the mindset, intellectual capacity and life view of the average voter. Over time, the value of the construction sector reflects the intrinsic value of the average voter. When you average voter is a collectivist, then the construction sector is the first of all the sectors to disappear into a pothole and the banking sector is the last.

Could not have worded it better Sensei!

I have friends in the small to medium construction business in Southern Africa and they always talk about the opportunities (in Africa), but they almost never mention the pitfalls and if you ask them about it they talk over it as if risks to property rights etc. are all just a myth. This while they watch the big companies listed on the JSE go bust, broke and into business rescue. I always get the feeling they must think they are extremely special because they will pick up the pieces and make bug money where their competitors didn’t make it and lost millions because the business environment and the government screwed them over.

It’s odd to me how the majority of the wealthy (middleclass and up) have this outlook that things are fine and can easily be turned around when the vast majority (68.3%) of the voters that bothered to pitch up voted for the ANC & EFF and their policies. If it was so easy why hasn’t the direction of the government, the country or the economy changed in the last 10 years?

The article picture is a good example of “social distancing” challenges.

There is another concerning matter seeing this picture. FIRE risk! Based on misconceptions, wildfires NOT ONLY are able to spread on Freestate farming veld. In this picture there’s a lot of combustible material stacked close together. The people need to be mindful of that & take steps to protect themselves better.

Afrimat is moving into mining resources in the broader sense and it was the rand-dollar exchange rate and the opportunistic iron ore venture that played out well, not the construction sector element. From aggregate to iron ore and adding coal. The actual constructors however cannot do the same: they remain dependant upon the actions of the state.

End of comments.

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