Construction sector in crisis
FOR decades, big construction companies were seen everywhere — Group Five, Murray & Roberts, WBHO, Aveng and Raubex.
After 45 years of trading on the JSE, Group Five filed for business rescue in March 2019.
In June, Probuild Construction Group applied to be placed in business rescue as it was financially distressed and unable to pay all of its debts.
Basil Read, Liviero Group and Esor Construction have all been placed in business rescue. LBC Lenco Construction applied for debt-freezing agreements, but has since been liquidated.
The construction industry is notoriously cyclical, but there is a current mix of a depressed economy, high levels of national debt, uncertainty and low infrastructure-spending, and contracts are drying up.
Thousands of jobs have been lost, 8 000 at Group Five alone.
The past nine years have proved to be ruinous. Construction companies that are South Africa-orientated were badly affected from mid-June 2018 to mid-June this year.
Marc Ter Mors, the head of equity research at Johannesburg-based SBG Securities, said: “In South Africa, volumes are low, pricing is under pressure and companies are taking on more risk to win contracts, so margins are thin and that hits cash flow.
There are no real segments to hide in.”
Murray & Roberts anticipated the crash and sold its building and infrastructure units in 2016 to move into international businesses focused on projects like underground mining, and oil and gas.
Although M&R’s market valuation is a fraction of what it once was, the stock has gained 44% in the past year amid takeover interest from 40% shareholder, Aton GmbH.
The industry was on a high in the build-up to the FIFA Soccer World Cup in South Africa in 2010, which required major national infrastructure spend, particularly on new stadiums. However, the Competition Commission had already started to investigate collusion in the industry.
The Commission settled with 15 firms in 2013, while Group Five was granted immunity for co-operating.
President Cyril Ramaphosa recently said that although government’s infrastructure spending had slowed, the state would contribute R100 billion into a fund over 10 years.
The plan is to use this to get financing from both private and state-owned companies to reboot the industry.
Meanwhile, the FTSE/JSE Africa Construction & Materials Index is down 27% in the past 12 months, compared to a six percent drop in the FTSE/JSE Africa All Shares Index. There is also a risk that if South Africa’s local construction industry is wrecked, future building projects will become more expensive, Ter Mors said.
“As South Africa depletes its capacity to build its own infrastructure, when the cycle turns again, it will be forced to rely on international companies and their pricing,” the analyst said.
By way of example, Aveng was among the top 40 largest companies by market value on the JSE in 2010, but now has a market value of R582 million from a peak of R28 billion in 2008.
Then, as the Jacob Zuma presidency took hold and the money that was meant for infrastructure was stolen, the big construction industry went into freefall.
But in recent years another problem has been putting a nail in the coffin of many of the smaller companies that subcontract to the large construction groups: unpaid debts.
Recent business failures and job losses in the sector have been blamed on the non-payment or late payment of contractors.
As at September 2019, the government owed construction and building industry contractors about R5,5 billion. This is according to an article in Moneyweb ‘Government owes construction contractors R5,5bn’ (September 19).
The article quotes Roy Mnisi, executive director of Master Builders South Africa (MBSA), as saying that late payment or non-payment by government is the single greatest challenge facing the industry.
Despite government ministers and Ramaphosa’s talking about the issue, nothing has been done to ensure that contractors are paid within 30 days after invoicing, as required by National Treasury regulations. In most cases, the work has been completed but the government doesn’t pay.
The president of the Black Business Council says that contractors are scared to exercise their legal rights against big companies because no further contracts will be forthcoming.https://www.news24.com/SouthAfrica/Local/Maritzburg-Fever/construction-sector-in-crisis-20191126-2