SOE tenders give embattled construction sector hope

But the industry’s capacity is severely reduced by the spate of corporate failures and exits.

WBHO’s Louwtjie Nel says opportunities exist for well-run mid-tier and emerging construction businesses to grow and fill the gap. Image: Moneyweb

South Africa’s troubled construction industry has been given a glimmer of hope, with state-owned enterprises (SOEs) Transnet, Eskom, the Airports Company of South Africa (Acsa) and the SA National Roads Agency (Sanral) advertising multiple multi-billion rand construction projects.

Louwtjie Nel, chair of listed construction and engineering group WBHO, confirmed this on Tuesday when the company released its financial results for the year to June.

“The re-emergence of large scale public infrastructure projects could result in an improvement in the local construction environment over the medium term,” he said.

However, Nel said the capacity of the industry as a whole has been severely reduced with the spate of corporate failures and exits from the construction market, resulting in minimal training within the sector and a significant emigration of skills.

Nel said progress has been made by government in restoring good governance within SOEs and that future opportunities exist for well-run mid-tier and emerging construction businesses to grow and fill the gap.

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Disruptions call for state intervention

But Nel said unrest and disruptions from communities, business forums and taxi associations are a concern and have become commonplace and increasingly violent, threatening the safety of the group’s people and impacting productivity.

“This unlawful activity needs government intervention and urgent resolution,” he stressed.

Nel referred to Sanral’s recent announcement that it will issue major road construction tenders to the value of more than R40 billion over the next two to three years. He said this bodes well for the sector, but cautioned that the execution of these projects is only likely to commence in WBHO’s 2021 financial year.

Commenting on the environment in which the group’s building division operated in the year, Nel said the low-growth economic environment, together with an oversupply of retail and commercial space, continues to delay the feasibility of large scale building projects in Gauteng, where revenue decreased by 7%.

He said the number of negotiated projects has decreased but that the division has successfully tendered against mid-tier contractors for smaller-sized contracts to sustain activity levels.

While the local building market remains subdued, the building division remains the preferred contractor, particularly on larger projects, through its ability to execute projects in a challenging environment, he said.

Mixed bag

Nel said the group produced mixed results in the year to June, with solid performances from both the African (including SA) and UK operations overshadowed by the recognition of a significant provision for anticipated losses on the Western Roads Upgrade (WRU) project in Australia.

WBHO reported an unprecedented Au$50 million (R496 million) loss provision in the six months to December on the road contract in Australia. Nel said no further provision for losses had been recognised on the project in the second half of the financial year.

He said significant focus is now being placed on pursuing the contractual rights of the business in terms of the contract, comprising material delay claims against the design consultants and other delay claims, plus variations against the ultimate client.

Nel said a specialist third party consultant had assisted in compiling the claim against the design consultants, with this claim expected to be submitted within the next month.

WBHO on Tuesday reported a 16% increase in group revenue to R40.6 billion in the year to June, from R35 billion in the previous year, which was attributed to the first-time consolidation of its UK operations.

The foreign currency translation gain on revenue from its Australian operations amounted to R426 million as the rand weakened slightly over the year.

Operating profit before non-trading items declined to R561 million from R1 billion because of the impact of the losses provided for on the WRU contract.

Highlights:

Headline earnings per share decreased by 34% from 1 414.6c to 932.3c.
The final gross dividend was slashed by 41.5% from 325c to 190c.
The group order book declined by 4% from R49 billion to R47 billion.

The order book of the roads and earthworks division increased by 39%, that of the building and civil engineering division by 8% and its UK operations by 21%, while that of its Australian operations decreased by 16%.

David Fraser, executive chair of Peregrine Capital, said WBHO produced a solid result.

“The provision was taken in the first half and it looks like the business is in relatively good shape,” he said.

“I like the fact that the cash balance was maintained after having paid R560 million for the additional part of the UK acquisition. The UK looks like it’s going nicely. Certainly with a 4% margin in that business, it is very supportive.”