Construction sector has ‘learnt its lessons’
Shares of major companies are stuck in the doldrums, at least partly due to underspending by the state
It is not clear what will bring life back into construction stocks.
Not even Murray & Roberts, which has exited the moribund SA civil engineering business and garners about 70% of turnover from abroad, can get the market to express interest.
Like many other major construction stocks listed on the JSE, the group, headed by Henry Laas, is struggling to free itself from a 17-year low in the country’s construction markets, despite having clearly signalled its intent to focus on global oil and gas, underground mining and power and water infrastructure projects.
To this end, it sold its SA-based infrastructure and building businesses to a black-owned consortium, led by the Southern Palace Group.
But the share is still stuck in the doldrums, having slumped 85% from nearly R95 in late 2008 — when the global financial crisis began — to about R12 now.
Allan Gray portfolio manager Simon Raubenheimer says that a decade ago investors couldn’t get enough of construction shares.
“Sentiment today is at the other extreme. There are some valid reasons for this: a depressed construction environment, poor project delivery and disputes with clients, to name a few. But where investors 10 years ago ignored the risks, today that’s all they see. Putting money into a construction company now is pretty contrarian.
“We don’t know when conditions will improve or what the catalyst will be, but most of our construction shares trade at discounts to our assessment of their midpoint-in-the-cycle fair values. We are — and have been — patient investors ,” he adds.
The rotten state of the country’s construction and engineering industry affects nearly all major listed construction groups. Some, like Aveng and Group Five, seem to have self-immolated.
Others like Basil Read have just withered away, despite having settled a nasty impasse with government over collusive behaviour and empowerment credentials.
The share price of Basil Read, a smaller construction company among the majors, has plunged more than 97% since the beginning of 2008 – from around R28 to about R0.65 now.
It reported a net loss of R474m for the six months ended June 30, mainly due to declining earnings within the roads division.
This week, the group announced a proposed R300m rights issue at a price of R0.22/rights offer share. This is a 63% discount to the closing price on Friday, January 19 2018. It had earlier drawn a bridge facility from the Industrial Development Corp (IDC) of R150m.
“A few legacy cash-depleting projects over the past years negatively affected the cash reserves of the company, resulting in cash flow being constricted and Basil Read being unable to meet future cash requirements without recapitalisation,” the group says. “Funding is critical.”
The group says it is committed to making a contribution to the transformation of the construction industry, but that “this is a journey and will not be achieved overnight”.
Fund manager Allan Gray has taken up the largest chunk of the shares on offer, 23.8%. “We think management have taken the valuable and expensive lessons from Basil Read’s past to heart and we believe the company is well positioned for a turnaround.
Potentially successful claims resolutions provide further upside,” Raubenheimer says.
Despite seven major construction groups having signed a settlement agreement with government over transformation in the industry, the SA National Roads Agency (Sanral), in its draft transformation policy, says it will not do business with companies that are less than 51% black-owned and which have less than a minimum broad-based black economic empowerment level 2 rating.
“Unfortunately this policy does not take cognisance of the settlement agreement,” says Wilson Bayly Holmes-Ovcon, better known as WBHO. “We hope that when [Sanral publishes its] final transformation policy it will incorporate our and government ’s commitment to the [settlement agreement with government].”
Sanral has not allocated more than 50 of 72 tenders in its most recent financial year, as it wrestles with treasury over unqualified tender processes.
This has left roadworks in short supply.
Many parties to the settlement agreement have experienced significant turnover of their boards and senior executives in recent times.
They are also selling off former manufacturing businesses in straitened markets, including for steel products, mostly to black-owned and managed SA industrial groups.
SA’s government pension fund manager, the Public Investment Corp, and associated bodies such as the Government Employees PensionFund and the Industrial Development Corp, hold large interests in groups that settled with government.
But the paucity of spending by the state on major infrastructure projects in the past decade — amid SA’s destructive political environment — has devastated the industry.
At the same time, severe downturns in mineral commodities prices and the risk of doing business in the rest of Africa have also taken their toll.