Slump for construction companies on JSE as govt defaults on promised developments

A lack of confidence in the government’s ability to deliver on its promised multi-billion-rand infrastructure investment plan is being reflected in the lack of any major movement in the share prices of JSE-listed construction and construction material companies. 

Construction-listed market intelligence firm Industry Insight reports that its contractors index fell by 8.1% in September as confidence in the government’s ability to deliver on promises dries up.

Industry Insight senior economist David Metelerkamp said there has been much hype about large-scale infrastructure stimulus and so-called shovel-ready strategic infrastructure projects over the last few months – but to date it has been all talk with very little action, apart from the recent launch of the R84 billion Mooikloof Mega City Development. 

“This is reflected in the falling share prices of contractors, as well as much worse than expected civil confidence in the third quarter of the year, according to both the FNB/BER civil confidence index, as well as the Safcec [SA Federation of Consulting Engineering Contractors] civil confidence index, with the government suffering from huge credibility issues,” he said.

The share price of Raubex, which is heavily exposed to the road building and rehabilitation market, slumped from R24.01 on 1 September to R19.00 on 30 September but has since recovered to close at R23.72 on Friday. 

The recovery in Raubex’s share price follows the company reporting on 8 October that it is optimistic about its future prospects despite expecting to report a slump in earnings of between 130% and 150% for the six months to August 2020 compared to the previous corresponding period. 

Raubex said the contract opportunities it has tendered for in the South African construction sector remain encouraging and reported that it was recently awarded a R1.48 billion 45-month contract by the SA National Roads Agency for the upgrade of the N3 Section 2 from Dardanelles to Lynnfield Park in KwaZulu-Natal. 

Metelerkamp said the construction suppliers index was down by a similar magnitude to the contractors’ index in September, and 8.2% lower than the previous month. 

He said this index has declined despite Afrimat continuing to release good results. Afrimat’s share price has steadily appreciated from R23 on 26 March, the day before Covid-19 lockdown was implemented, to close at R38.45 on Friday. 

Metelerkamp added that, most notably, the share prices of the likes of ArcelorMittal SA and cement maker PPC declined in September, with ArcelorMittal down 20% and PPC 26.3%. 

ArcelorMittal’s share price declined by a further 2.7% in October to close at R0.35 on Friday while PPC’s share price remained stable and closed at R0.59 on Friday. 

Peregrine Capital executive chair David Fraser said the share prices of most companies have not yet priced in any of the benefits of the government’s infrastructure expenditure plan. 

Fraser said Afrimat is an exception because its share price is just off its all-time high and 40% of its earnings are now from iron ore – but it is certainly a construction materials and aggregates company, and the infrastructure plan is one of the drivers of its share price. 

He added that Raubex’s share price is seeing some benefit from the infrastructure plan because of contract awards and the growth in its road construction and rehabilitation order book. 

But Fraser believed investors were correct to be sceptical about the infrastructure plan. He said there was almost a need to analyse the list of projects on a project-by-project basis.