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What a horrible year for the listed construction sector

Transformation lags in struggle for survival.

At the end of 2016, the local listed construction sector was hoping for a new dawn that would see government resume the workflow the sector lost due to reputation damage, following its earlier admissions to bid rigging.

However, a year later the industry is in tatters. The first payments in its costly agreement with government to speed up transformation hurt the companies’ financials, government work is still by-passing it and one of its biggest public sector clients has thrown a curveball that might see it lose even the little government work that was still coming its way.

The value destroyed in this industry over the past year is tremendous and comes with the loss of jobs that the economy so dearly needs.

The share prices completely reflect the dire state of the sector. With the exception of market darling Wilson Bayly Holmes-Ovcon (WBHO) and Murray & Roberts that completed the sale of its local building and construction business in the first half of the year, all the other big construction companies lost 50% or more of the value of their share price in the year to date.

Company

Share price

% Change YTD

Group Five

R11.21

-54.80

Basil Read

R0.69

-69.06

WBHO

R159.99

+4.83

Aveng

R2.05

-74.94

Stefanutti Stocks

R2.30

-50.00

Murray & Roberts

R10.84

-8.85

Share prices as on December 20 2017.

 

Group Five

As early as February 2017 Eric Vemer suddenly departed from Group Five, followed by several other executives and board members. PSG Asset Management exited Group Five and Coronation bought shares to the level of 14.49% shareholding.

Themba Mosai was appointed as new CEO.

Following pressure from shareholder Allan Gray the board was ousted and replaced at an extraordinary general meeting, featuring among others former Group Five CEO Mike Upton.

The group reported a loss per share of 829c and headline loss per share of 335c for the 2017 financial year.

A rushed offer from Greenbay Properties for the acquisition of Group Five’s crown jewels, its Investment and Concessions business, for R1.6 billion lapsed. It sold Group five Pipe and is in the process of disposing of its other manufacturing assets.

In December the group warned that its interim results for the period ending December 31 could see the loss per share amounting to 409c and headline loss widening to 415c per share. This is due to further delays on its Kpone project in Ghana and the downscaling of its South African roads and civil engineering business.

In terms of Group Five’s newly-approved strategy it will exit the construction business where it is not considered sustainable and will retain a building and housing business plus a small South African civil engineering business.

Basil Read

Early in December Basil Read announced that it has negotiated a debt standstill with a consortium of six of its creditors. This gives the creditors wide-ranging rights in exchange for a repayment holiday.

This came after a difficult year that saw the departure of former CEO Neville Nicolau in May.

Discussions for a private placement with a company that would see Basil Read retain its black-owned status collapsed.

Interim results for the period ended June 30 showed the headline loss widening to 295c per share and basic loss to 360.9c per share on the back of among other things a poor performance of the roads divisions and outstanding project claims. The group said cash is “critically tight” and expressed the need to raise up to R300 million to stabilise the company and meet operating commitments.

The group obtains some bridging finance and appointed TK Mapasa as CEO in October.

The rights offer has to be completed by May next year in terms of the group’s debt standstill agreement with its creditors.

Aveng

Aveng ended 2016 in a loss-making position and saw its financial situation worsen towards the end of its financial year on June 30.

After some disappointing claims outcomes the group reassessed its uncertified revenue and in August postponed the announcement of its annual results by a month.

Its independent non-executive board chair made way for the appointment of Eric Diack as executive chair to assist then CEO Kobus Verster.

The group reached agreement with its funders to renew and extend its facilities to ensure sufficient liquidity.

Verster eventually resigned shortly before the announcement of the annual results, which showed a massive R6.7 billion net loss. The loss was attributed to impairments on uncertified revenue and claims, other write-downs and the weak trading conditions.

In November two directors resigned and the group saw significant push-back from shareholders at the annual general meeting against its remuneration policy.

Earlier this month the sale of a 51% stake in local construction subsidiary Grinaker-LTA collapsed Aveng attributed it to the buyer Singabakhi Holdings’ failure to secure funding, but Singabakhi hit back blaming it on under-performance by Grinaker-LTA.

Aveng is still without a permanent CEO and hopes to make an appointment in the first half of 2018.

Stefanutti Stocks

Stefanutti Stocks did not experience the kind of drama that occurred at some of its peers. Its results for the year ended February 28 reflected a loss, but the group returned to profitability when reporting its interim results for the following six months. It showed an operating profit of R119 million, earnings per share of 47.06c and headline earnings per share of 44.81c.

WBHO

Market darling WBHO showed a profit for the year ended December 31 2016, although the results were impacted by the reflection of the settlement payable in terms of the industry settlement with government.

In June it recorded earnings per share of 1 335.6c and headline earnings per share of 1 307.9c with a growing order book.

The year was fairly uneventful but notably the group entered the UK market through the acquisition of a 40% stake in the Byrne Group.

Murray & Roberts

After announcing the sale of its local infrastructure and building business, Murray & Roberts relocated from the JSE’s Construction & Materials sector, sub-sector Heavy Construction to the General Industries sector: Diversified Industrial.

The sale was completed in May and saw the group exiting the local construction industry. This decision seems to have served it well and the group traded profitably.

Transformation

The majority of the listed construction groups have seemingly not made much progress with their transformation commitments in terms of the industry agreement with government.

They had a choice to either sell at leat 40% equity to black partners, or mentor and develop three emerging black contractors according to set targets.

2018 might see more pressure on the sector to perform in this regard.

Failure in this regard will further prejudice the sector when the South African National Roads Agency (Sanral) finalises its transformation policy early in the new year.

The Sanral requirements are even more onerous than that contained in the sector agreement with government. Sanral being the one public sector client that continued to provide work for the construction industry, non-compliance with its transformation policy could cost the sector dearly.

Its draft policy indicated a requirement of at least 51% black ownership with at least 30% black management control and level 2 B-BBEE rating. It further limits the number of contracts awarded to a single entity to 15 nationally and three per province. Companies operating in only one province will qualify for no more than five tenders per province per year.

At the launch of its draft policy in October, Sanral provided Moneyweb with its view of its listed construction service providers. While Sanral had little data regarding the levels of black management control, Group Five was the only large contractor with the required B-BBEE level as well as black ownership.

Source: Sanral

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The construction sector is an objective indicator of the state of the nation. The profitability of the sector is a measure of the effectiveness of government. In any democracy, the state of the infrastructure is merely a reflection of the mindset of the average voter. The average voter is a myopic socialist with a victim complex, so he supports the political party who promises to redistribute the assets of the nation.

The ANC is like a company that pays more in dividends than what it generates in profits – liquidity issues and bankruptcy are knocking on the door. To add insult to injury, government forces businesses that are not economically viable to “empower” some of the citizens by making them partners. Now if you see yourself as a victim who needs to be empowered, you are in for a rude awakening when you realize that you are now a partner in a bankrupt business. This is the empowerment this socialist ANC government brings to their supporters. They are managers, board members and shareholders in declining, non-viable and bankrupt businesses.

The country is in dire need of infrastructure projects. The sewerage works, road-infrastructure, railways, harbours, schools, hospitals, electricity grid etc need to be upgraded, renovated and built. We have got some of the best engineers and construction companies in the world, ready to do this work. The government however is way too incompetent, negligent and corrupt to supply the funding in an efficient manner.

The construction sector is in serious decline, because there is no government in South Africa. The leaders are morally bankrupt. There is nobody behind the wheel, while the train is heading for the cliff.

One of the best comments I have read on Moneyweb.

It sums up the state of the country or what is left of it after the Zuma disease.

If you want to know what the state of the infrastructure in the country will be like in 10 years time, look at the current balance-sheets and income statements of construction companies. There can be no better leading indicator of the state of hospitals, electricity grid, water supply and sewerage works than this. To ensure the soundness of our infrastructure in 10 years time, the work should have started already, and the cash-flow should have been reflected in the income statements of construction companies. The financial position of the construction sector warns us that we will all be using pit latrines within 10 years time.

Correct, very likely scenario. I see potential value in pit latrines.

Noticed a sign-writed slogan on a private plumber bakkie: “We take our customers’ shit”

SA government is strongly in favor of using Chinese construction companies from now going forward. Good thing about Chinese is that they don’t only do the construction but they also finance these big projects, bring on board their own Labour to ensure projects are completed on schedule. Chinese aren’t part of the boys club – no price fixing

Chinese labour is very cheap as they are sometime convicts who work to pay their debt to society and usually resettle in the African country they were labouring in.

Any country that completely accepts Chinese contracts on the usual Chinese terms is setting themselves up for very unpleasant surprises decades in the future.

China is on track to be the world’s next superpower. My personal opinion is they’re already there. The USA is in terminal decline and it’s only a matter of time before the chickens come home to roost. The US has been in this declining trend for several decades. It’s not something that has suddenly happened. And Trump has little to do with it and cannot fix it because it’s all about the changing demographics.

China is well aware of the weakening of the USA and is playing an astute long game to take advantage of this.

China needs to secure both minerals and geographic influence. And Africa with it’s corrupt and weak governments has become a prime target for Chinese expansionism (just another word for neo-colonialism).

So the Chinese are permanently exporting thousands of criminals they don’t want in mainland China anymore to unsuspecting host countries who mistakenly think they are getting a bargain.

These Chinese immigrants do not come without strings attached. Their long term loyalty is to homeland China. Not to their new “adopted” country. They will act in China’s interests when commanded to do so.

Go anywhere in SA or Africa now and the new Chinese presence is increasingly unavoidable. Even in the most out of the way and desolate of places. Like Nababeep.

The Chinese are hard workers and it is only a matter of time before they start taking over the local economy to the exclusion of the locals. It’s already happening!

This is a massive future problem in the making.

The Westerners colonialized Africa with the use of the gun and with the help of diseases like measles. The Chinese colonialize Africa with charm and promises of partnerships. The results will be exactly the same, but Africans will welcome it this time around. People with a slave mentality always succeed at enslaving themselves.

How can Sanral have higher BEE requirements than Government, when they are subservient to Government. Sanral’s position seems illegal and also racist. Eskom has higher BEE requirements because it suits the Guptas. Who is behind the SANRAL requirements? Connstruction companies should challenge these higher requirenments.

Please note that Aveng and Basil Read ,the 2 companies with the highest BE component are also the one’s with the biggest losses.
as far as i and many of my colleagues are concerned BBEEE is a parasitic monster.
these BBEEE ”’partners” are bleeding these companies without adding value.
unfortunately it is the African norm to always want a helping hand (begging, blackmail)than doing things from the ground up.
I sold my company 10 years ago because of increasing BBEEE demands and government red tape- the new owners lasted 3 years before going bang.
the paradox of this situation is that non- white ex-employees of the company still call me ,( the unwilling whitey) for financial and mentoring assistance.
what this government is creating is akin to communism where people cannot do anything for themselves

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