Tough year for construction
Some of the country’s major construction companies could barely keep their heads above water as weak market conditions persisted in 2018.
As the year draws to a close, there is no end in sight to the troubles that have affected some of the big players in the sector, with pressure on margins and lower order books.
There was no joy in 2018 for the shareholders of Aveng, Group Five and Basil Read.
Group Five has been preoccupied with mopping up the mess that has become of its once-promising contract to build the independent gas- and oil-fired combined-cycle power plant in Kpone, Ghana.
For the 2018 financial year, the loss on the project was R1.3bn.
Perhaps the biggest news in the sector was German family owned investment holding firm Aton’s bid to acquire Murray & Roberts for R17 a share. M&R rejected the offer.
The privately owned Aton is still circling M&R and its mandatory offer to M&R shareholders stands.
M&R maintains that the Aton offer undervalues the stock, saying a fair value price range is between R20 and R22 a share.
M&R has said that its shareholders are not required to take action in relation to Aton’s mandatory offer at this stage.
On the other hand, Aton – which is M&R’s largest shareholder – thwarted M&R’s attempt to buy struggling construction firm Aveng, in a R1bn transaction that would have thrown Aveng a lifeline.
According to M&R, the transaction with Aveng was compelling.
“The proposed combination of Murray & Roberts’ Oil & Gas and Underground Mining platforms with Aveng’s McConnell Dowell (infrastructure) and Moolmans (mining) businesses was compelling and would have established Murray & Roberts as a significant multinational engineering and construction group,” M&R CEO Henry Laas and financial director Daniël Grobler wrote in the company’s 2018 annual report.
When the German firm pulled the plug on the deal, it was back to square one for Aveng. With the deal under water, Aveng must now pull itself up by its bootstraps.
In 2018, Aveng took a number of steps to get out of distress, including a R493m rights issue, early redemption of a R2bn convertible bond and renegotiation of bank debt to reduce gross debt/equity from 127% to 40%.
It also disposed of non-core property assets and Aveng Rail.
It is in the process of disposing of the steel and other manufacturing businesses.
This will allow Aveng, which in 2018 reduced debt from R3.3bn to R1.8bn, to focus on engineering, construction, maintenance contractor McConnell Dowell and surface mining contractor Moolmans, in line with its strategy to be an international infrastructure and resource company with a footprint in developing and fast-growing regions.
Then there is WBHO, which brushed aside difficult conditions and performed well in SA, Africa and Australia.
In the year ended June 30, WBHO’s revenue increased by 10% to R35bn, while its order book was a healthy R49bn.
As at June 30, Group Five’s order book stood at R11.2bn.
WBHO chair Mike Wylie said SA’s economic and political outlook remained uncertain in the short to medium term.
“The economy still has a number of obstacles to overcome, which will no doubt take time. Until such time as government is able to expedite its public infrastructure spend programme, we anticipate that some fallout may take place within the local construction industry,” Wylie said.
WBHO said the SA construction sector had taken a turn for the worse in 2018.
It said stiff competition for work had resulted in keen bidding, lower margins and increased prevalence of loss making projects.
In SA, gross fixed capital formation contracted as capital spending by the private sector and government decreased.
“Fixed investment spending continued to be hampered by the constrained fiscal space, policy uncertainty – in the mining sector in particular – and very weak civil construction confidence,” it said.
Stephen Meintjes, of Momentum Securities, said the construction sector would only recover if private and government spending improved.
“The government must also restore confidence in terms of policies, especially in relation to land reform. It is a pity that by the time the industry recovers a lot of capacity will have been destroyed,” Meintjes said.