Photo:  Raubex’s financial and commercial director, Francois Diedrechsen

Six months ago, most construction companies expressed hope that the worst of the prolonged building-sector recession was over. Today, few executives can offer a better prognosis.

Operating margins of the work that companies tender for now are low, and there are no immediate sign of improvement. The outlook for new projects under government’s infrastructure programme is also uncertain. Everyone knows it is coming, but no-one is sure when. In addition, private-sector clients have been hesitant to invest in large capital projects because of economic uncertainty.

“It feels like we’ve reached bottom,” says road builder Raubex’s financial and commercial director, Francois Diedrechsen. But he says there is no sign of when an uptick will occur. Margins could remain low for at least another 12 months.

The industry has been in the doldrums for about four years. Average share prices have followed suit, and investors are still unsure of the right time to invest in construction stocks.

Stefanutti Stocks CEO Willie Meyburgh says the industry needs to see more developments before it can speak of real change. Developments in the renewable energy sector could be among these. A firmer intention by government to award work as part of its infrastructure programme would also boost confidence.

The industry, he says, has held on to optimism, but none of this has been realised yet. “We would like to believe we are at the bottom. But for the next year at least, the market will be competitive,” Meyburgh says. This means work will still be priced at tight margins.

There are signs that the business is growing. Stefanutti’s revenue for the six months to August jumped 28% to R4,9bn. However, industry competition and a bad debt write-off caused operating profit to decline 50% to R89m. This resulted in Stefanutti’s operating margin dropping from 4,7% to 1,8% in the space of a year. Headline EPS (HEPS) dropped by 61,6% to 27,19c/share.

Meyburgh says Stefanutti’s order book has stabilised at a value of R9,4bn. But additional funding was required for the acquisition of Cycad Pipelines and for capital expenditure (capex). This drove interest-bearing borrowings higher to R649m, from R360m in the interim period to February.

Part of Stefanutti’s problem has been loss-making contracts. Its buildings business unit was hit by problem contracts in its inland, housing and Mozambique divisions. Meyburgh says attempts to recover funds are under way. And by the end of the financial year, most loss-making projects will be wrapped up. It has also had to write off a nonrecoverable debt in Mozambique.

Its other divisions have fared better. Meyburgh says the group is waiting to hear about a number of project awards in its other divisions, which may be awarded at slightly higher margins. It hopes to benefit from power line transmission and distribution projects. Eskom is expected to announce new work early next year. It has also positioned itself to benefit from opportunity in the oil and gas sector. However, reduced capex by mining houses will keep competition levels high.

In comparison, civil engineering contractor Protech Khuthele looks poised to benefit from a strategy overhaul. An almost entirely new management team, led by newly appointed CEO Antony Page, is credited with a complete turnaround.

After a period of steadily declining earnings, Protech returned to profitability in the six months to August, from a loss at the end of the year to February. Revenue rose 7% to R530,6m, while operating profit jumped 92% to R32,2m.

Though HEPS are down 2,6% to 3,7c/share, the group’s operating margins almost doubled to 6,1%.

Management has emphasised the sustainability of the new strategy, which encompasses every element of the business.

Though its order book is lower (R1,05bn compared to R1,1bn in February), Page says the company’s tender risk process has tightened. “Our efforts have been to avoid the trap of sacrificing future margins to bolster our current order book.”

The group hopes to benefit from public-sector infrastructure investment, a more entrenched role in mining which may yield higher-value contracts, and opportunities elsewhere in Africa, particularly Zambia, Zimbabwe and Mozambique.

Tighter management of its debt has also helped the group. Its gearing ratio has almost halved to 36%. Cash flow from its operations rose 46% to R111,8m.

Geotechnical specialist Esorfranki’s results are also upbeat, which may signal the beginning of better news in the sector. Its revenue is up 33% to R1,14bn for the six-month period to August.

Operating profit rose to R78,7m from a loss of R14,4m previously, and HEPS of 7,8c (300% higher) reversed the previous comparative period’s headline loss per share of 3,9c.

Much of the increase is due to a refocused strategy. Esorfranki was able to grow its order book by 35% to R2,4bn. It also improved its external debt position. It raised R202,5m in a high-yield bond programme, which was used to finance capex.

Like almost all other companies in the sector, it has sought to increase its footprint outside SA. About 40% of Esorfranki’s geotechnical contracts come from elsewhere on the continent. These markets accounted for about 15% of the group’s total work.

In comparison with offshore revenue growth of 26%, domestic revenue increased by just 1,2%, says CEO Bernie Krone. It recently secured its fifth contract in Ghana and is also looking at Mauritius and Mozambique, which offer opportunities.

Raubex’s interim results for the six months to August were also released last week. It shows a 7,7% rise in revenue to R2,81bn and a 3,1% increase in operating profit to R290,8m. HEPS rose 3% to 95,7c , compared to the previous comparable period.

The company’s cash flow from its operations is up 68,6% to R443,8m.

Diedrechsen says Raubex has been able to maintain a steady flow of new work. Half of its R5bn order book still depends on work from the SA National Roads Agency. Most of this work is on nontolled roads. The future of new tolled roads, however, is still uncertain after the transport department decided to suspend them last year.

Diedrechsen says Raubex will finally settle a payment dispute with the Free State government. The province will pay Raubex an agreed settlement amount of R130m for road rehabilitation work issued in 2010. It is payable in two instalments. Almost R100m will be paid this month and the rest in April 2013. Delayed payment from the Free State roads department helped force civil engineering firm Sanyati into liquidation earlier this year.

Raubex incurred far higher capital expenditure in this period. It spent R280,9m, compared to just R88,3m in the first half of the year. Most of this is a one-off expense as it prepares for an uncertain future as far as the supply of bitumen goes. The mineral is used to produce asphalt for road construction. Supply shortages have occurred for the past two years during the summer road-building season, threatening to bring some road construction projects to a halt. Raubex has erected custom-built containers which are capable of storing bitumen that has been imported.

“Local refineries supply what they can, but it is a diminishing supply,” says Diedrechsen. He expects a 20% shortfall this season, but this is set to rise to 30% within a year. Imported bitumen is also slapped with an import duty, making it more expensive.

Analysts are cautious about how to time the recovery. For now, most of the advice is to hold on to shares in the sector. One exception, however, is to buy Esorfranki.

 

 

Source: http://www.fm.co.za