'Construction behemoths dug their own graves'

01 March 2015 - 02:00 By THEKISO ANTHONY LEFIFI
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South Africa's big construction companies have brought their woes on themselves, says Inyatsi Construction Group chairman Frans Pienaar.

Inyatsi, which has been operating in Swaziland since 1992 and opened shop in South Africa in 2007, shortly before construction stocks crashed, is one of the many companies vying for projects expected to flow from the government's infrastructure programme, worth about R4-trillion over the next 15 years.

Pienaar said the 15 construction companies that were fined R1.46-billion for colluding on tenders, including for World Cup stadiums, had "hurt themselves". The motive for the collusion, Pienaar believes, was to squeeze smaller players such as Inyatsi out of the market.

If those firms could get work at any price, "then you become less efficient", he said. "The reason they are struggling now ... [is that] when they are required to return to efficiencies as required in a competitive market, it is very difficult."

Between 2011 and 2013, the sector grew by just 0.2%. Investors began to shun construction shares as the loss-making projects piled up.

In a note to clients, Allan Gray analyst Rory Kutisker-Jacobson said things may get worse before they get better for the sector. And they certainly appear to be getting worse.

In February, South Africa's biggest construction firm, Aveng, reported a drop in half-year profit. It blamed the 58% slide on labour disruptions and a slowdown in public building projects.

Group Five reported its net profit had slid to R146-million from R219-million, and announced plans to reduce staff. But its plans to counter the local downturn are gaining pace as CEO Eric Vemer said the group now made 60% of its earnings outside South Africa, and it had a R18-billion order book.

In February, WBHO said its headline earnings would drop by between 5% and 10%. Its share price took a knock due to the announcement, falling from about R120 per share to R113.60 , before recovering somewhat .

Necessity Ngorima, an analyst at JPMorgan, believes that of all the construction firms, Murray & Roberts is still the best pick.

"M&R is better positioned for growth than its peers as it has now exited its large loss-making contracts," Ngorima said in a report to clients.

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