Johannesburg - South African construction companies had important decisions to make about rightsizing as they had been struggling in the past few years and would continue to experience challenges with margin pressure in the short term, PwC said.
PwC energy and mining assurance partner Andries Rossouw said yesterday that there had been a 4 percent drop in the total secured order book of South Africa’s nine listed construction firms in the year to June, the first fall in five years.
Rossouw said this reflected the impact of subdued domestic economic growth and PwC did not know the margin on the orders at these companies.
But Rossouw said PwC would like to think from the rhetoric coming from the companies that they had pulled back from chasing revenue without any regard for profit and it was “now time to start retrenching and cut our cloth to the size it should be and focus on profitable contracts”.
Infrastructure spend
The companies in the study were Wilson Bayly Holmes Ovcon (WBHO), Murray & Roberts (M&R), Raubex, Calgro M3, Group Five, Aveng, Stefanutti Stocks, Basil Read and Esor.
The study said infrastructure expenditure by the public sector was a good indicator of the industry’s performance and the government’s ongoing National Development Plan and its continued commitment to public infrastructure investment of R810 billion over the next few years was positive.
However, it said the reduction in planned expenditure over the next three years highlighted the tough economic environment experienced by the country and, therefore, the heavy construction industry.
Rossouw said there was an R18.6bn shortfall in forecast public sector expenditure last year, the latest year for which figures are available, which indicated the expected increase in expenditure was not happening in line with expectations.
He said the private sector was also a big player in terms of construction expenditure but the challenging global mining environment and the 10-year low in real terms in commodity prices had resulted in mining sector capital expenditure falling R16bn over the past two years to R55bn this year.
Falling values
This was the lowest level of capital expenditure by the mining industry in the past 10 years, he said.
Rossouw said eight of the nine companies included in the study experienced a decrease in market capitalisation in their 2015 financial year.
The market capitalisation of the nine companies combined fell by 38 percent to R25.9bn at the end of June from R41.6bn last year.
Aveng and Esor had the largest individual decrease, with Calgro M3 the only company to increase its market capitalisation in this period.
The report said the construction industry was and had always been a very low margin industry, but net profit reduced by 54 percent and the profit before interest and tax had halved compared with the year before.
“Although five of the companies on the list increased their net profit, these increases were more than offset by the R921 million decrease from Basil Read, R506m from M&R, R359m from Group Five and R142m from Aveng,” it said.
PwC was more optimistic about the longer-term future of the construction industry.
Rossouw said infrastructure investment was required in South Africa and across Africa, which should support the growth in the South African construction industry.
BUSINESS REPORT