You are currently viewing our desktop site, do you want to visit our Mobile web app instead?
 Registered users can save articles to their personal articles list. Login here or sign up here

Construction industry in survival mode

‘An absolute destruction of a sector never before seen on the JSE’ – Industry Insight.

There appears to be little light at the end of the tunnel for South Africa’s beleaguered construction industry, with many major listed construction companies still fighting for their survival.

Basil Read, Group Five, Esor Construction and Liviero Group are in business rescue while others, such as Aveng, have been forced to downscale their operations to strengthen their balance sheets and improve their liquidity.

The problems in the industry have been largely attributed to a combination of a lack of large government infrastructure contracts because of government’s strained financial resources and problematic and loss-making contracts.

This resulted in construction industry employment dropping by 3.6% year-on-year in the first quarter to an estimated 618 000 as the industry shed a further 23 000 jobs in the quarter.

Group Five’s auditors, PwC, resigned earlier this month with immediate effect following the resignation of a number of non-executive directors of the group and several senior executives and key finance staff employees.

The group reported last week that its business rescue practitioners planned to publish a business rescue plan by August 30 after creditors last month agreed to extend the original June 28 deadline for publication of the plan.

Construction market intelligence firm Industry Insight reported this month that “we have most probably seen the last of Group Five” with business rescue practitioners telling shareholders in June their shares were basically worth nothing and the group was not in a position to fully reimburse creditors.

Industry Insight added that the contractors index was at 25.6 points at the end of June, which was slightly down from May, and remained at the worst level ever.

“What this essentially means is that listed construction has lost almost 75% of their value or ‘size’ since 2008,” it said.

Industry Insight described this as “an absolute destruction of a sector never before seen on the JSE”.

Group Five’s financial difficulties became a crisis in December when the group’s bank guarantee providers paid $106.5 million to Cenpower Generation for the $410 million Kpone power plant in Ghana in delay damages.

The group is still involved in contractual disputes with Cenpower and indicated earlier this year it expected a ruling on these disputes by the end of this year.

Group Five’s business rescue practitioners reported that since inception of business rescue proceedings, payments under certain guarantees have been called for and made, amounting to about R105.1 million.

“There have also been further notices received calling for payment under other guarantees. However, these notices are being considered and may, where appropriate, be defended. Updates regarding further payments under the guarantees will be provided in future reports,” they said.

Selling off

The business rescue practitioners reported they were continuing to engage in many sale processes related to subsidiary companies, operating divisions, properties and/or shareholdings that may be disposed of to relieve the burden of the secured debt owed by the company as well as to provide working capital for the business rescue proceedings.

Aveng has been active in selling identified non-core assets to improve its financial position.

This month it agreed to sell its Rand Roads business as a going concern plus the value of inventory for R30 million to Ultra Asphalt; its Aveng Grinaker-LTA Engineering (GEL) geotechnical contracting business to a newly formed investment special purpose vehicle for R7.5 million; and Aveng Dynamic Fluid Control (DFC) to wholly black-owned investment company Copaflo for R165 million.

Aveng last month also reported the conclusion of the sale of its water business to wholly black-owned Infinity Partners for R85 million.

David Metelerkamp, the senior economist at Industry Insight, said the amount received for Aveng Water was a reduction to the original selling price of R95 million and seemed a small sum of money given Aveng’s financial difficulties.

Metelerkamp said Aveng’s share price continued to flat line and hovered between 2c and 3c, which was a far cry from over R40 a share in 2007/8 and also down by almost 80% over the last year when the share price was at 10c a share.

Contracts

The majority of the more than 20 construction contracts Basil Read had at the commencement of business rescue had either been completed or terminated.

The company’s business rescue practitioners reported last month that three of the remaining contracts were continuing to completion, five contracts were in the process of being descoped or ceded to other contracts and three had been handed over to the clients and the company was engaged in a defects remediation process.

They added that performance guarantees had been reduced from R1.1 billion at the outset of business rescue proceedings to about R744 million and the company continued to pursue a number of contractual claims valued at more than R200 million.

With the exception of the employees required to assist with the completion of the contracts, including the various Medupi power station contracts and the remaining staff at head office, all other employees had been retrenched.

Basil Read has relocated it head office to reduce costs, has continued to sell surplus plant and equipment, and is pursuing expressions of interest from a number of parties for its remaining non-core assets.

The group said the business rescue practitioners remained of the view that a full implementation of the plan would achieve a better result than a liquidation.

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

AUTHOR PROFILE

COMMENTS   23

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up for FREE

” Industry Insight described this as “an absolute destruction of a sector never before seen on the JSE ”

Proudly brought to you by the ANC !!!

@Casper1… what if the distruction of this sector is orchestrated from corridors of business power… Remember these construction companies are the backbone of the infrastructure integrity of our country. Institutional funds are invested here: PIC, Unit Trust, Private sector pension funds, just to name a few. The ANC has no capacity to destroy business, business is fully capable of self destruction. Shareholders sit and lick their own wounds by the sidelines.

What never ceases to amaze me is that we have a watchdog in the form of the JSE and it does not see all these anomalies. Something is wrong here in a big way. Take for instance AVENG trades between 2 cents and 3 cents on the JSE for the better part of this year, this puts it’s market capitalization betw R350m and R500m… Yet its total Assets as at 31 December was R13,255 billion. The cranes in Sandton alone are worth much more than the MKT CAP of AVENG.

The JSE is napping, and without a credible JSE South Africa must forget of any recovery in the economy. JSE is bigger than Seinhoff… I worry.

Boombang I worry about you never mind the JSE. ANC is the cause of the economy being where it is.
If you believe what you say about Aveng buy hundreds of thousands of shares. The price of the share is what the market feels the share is worth. What is the value of their debts? Do the have work?
casper 1 you are spot on with your comments.

Go and have a look at the BBBEE certificates of these companies. All are majority “locally” owned. Some over 80%

The article does not mention the fact that if shares are “given” away to beneficiaries it destroys the value.

Investors (people with money) are aware of this and invest elsewhere.

There are two types of shareholder. Beneficiary and Investor. One creates value the other destroys value.

Our own dear president being an example of the first kind, an undeserved beneficiary of billions who added not one iota of value to the companies who have to support him as a parasite.

Greed in the name of diversification is the cause of the woes in the South African big business arena…. they diversify to the level that they themselves do not know if they are are Arthur or Marthur. They are now paying the price… To get out of trouble they do funny business acrobatics… From selling the so called non core assets, to downsizing and eventually retrenching employees. How does part of a going concern suddenly become non core. What made it core in the past, was that not through poor executive decisions? What happens to those executives with poor decisions now? They walked away with millions if not billions in share options or bonusses…
This cannot be blamed on the ANC… It is businnes my friend not politics.

Basil Read director qualifications below a few years ago. I think around +- 2016. Just got it of a mail I sent a friend that considered investing in them at the time as they were dirt cheap. Needless to say they got cheaper.

Banking
Mining
Accountant
Accountant
Accountant
Civil engineer.
Finance
Media.
Finance
Finance.

The first non core asset they sold after entering business rescue is the mining division that actually made money.

@Casper1… what if the distruction of this sector is orchestrated from corridors of business power… Remember these construction companies are the backbone of the infrastructure integrity of our country. Institutional funds are invested here: PIC, Unit Trust, Private sector pension funds, just to name a few. The ANC has no capacity to destroy business, business is fully capable of self destruction. Shareholders sit and lick their own wounds by the sidelines.

What never ceases to amaze me is that we have a watchdog in the form of the JSE and it does not see all these anomalies. Something is wrong here in a big way. Take for instance AVENG trades between 2 cents and 3 cents on the JSE for the better part of this year, this puts it’s market capitalization betw R350m and R5m… Yet its total Assets as at 31 December was R13,255 billion. The cranes in Sandton alone are worth much more than the MKT CAP of AVENG.

The JSE is napping, and without a credible JSE South Africa must forget of any recovery in the economy. JSE is bigger than Seinhoff… I worry.

Their planning must have been really terrible. I get that government infrastructure spend is down, but construction is famous for huge cycles and virtually all such projects have multi-year planning and permits before a spade is turned.

Did they imagine the boom and their World Cup organized crime festival would just continue forever????

Most of the offshore endeavors ended in tears – biting off more than they should in a belief that they are better than they were.

For investors the question : who will survive and do well? It is not as if there will be no construction companies after the mess is sorted

Before everyone blames government and BEE (not without reason) let’s not forget that the construction industries big players were found guilty of collusion and price fixing after the 2010 FIFA world cup. That destroyed their credibility and obviously gave government reason to close the taps.

…but why kill business, why kill jobs, why destroy the economy yet the responsible people are roaming around scott free. The way we see things in this country is sick, really sick.

But it was overinflated in 2008 by the construction of stadiums for the soccer world cup.

Since then it has been carried on the momentum of the Zuma corruption. Rhamaphosa is in now so obviously revenue will shrink from the inflated tenders for kickbacks to cadres.

People have very short memories.

This construction sector collapse (the second largest sector for employment) is brought to you curtesy of the ANC.

Thank you for the interesting article Roy, perhaps for completeness visit PPC HQ and perhaps other suppliers to the construction industry and observe what happened there & its staff!

Read this and all the comments and its a matter of: You can only but weep for what was and what could’ve been.

It all started with those horrific fines imposed by the Competition Commission after the soccer world cup.
All profits – and more – gobbeled up in fines and distributed to……. where?
The result is an industry destroyed.

This is a very unfortunate outcome, with employment obviously being the biggest loser. It will most definitely drive the highly skilled and experienced out of the country to look for greener pastures.

The only contenders left for the big infrastructure projects (that’s if there will be any) will be the Chinese and they only make use of their own fong kong products and skilled labour. Only the politicians will gain from this. It’s a sad tale indeed. Next will probably be the mining industry.

ANC racists and others (think EFF) do not want Whites in this country and are prepared to destroy entire industry’s in order to continue to make it happen.

Last year provinces spent 17% of their budgets on infrastructure – this year it is 3%.

The Competition Commission also played their part in the construction industry downfall.

It is a pity because the country needs infrastructure and it is a quick way to increase employment.

As a Civil Engineer (not in SA now) I can add that of the full team of about 20 Engineers that delivered a successful Mega-Project a couple of years ago, I think maybe 2 are still working in SA. The Contractor’s whole team was basically bought by 1 company and they are all working in Qatar. A lot of expertise is lost. SA Engineers are working all over Africa/Middle East etc, and that’s not just white Engineers

Load All 23 Comments
End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

SHOP NEWSLETTERS TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: