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The construction industry is unlikely to see strong returns in SA for a couple of years‚ says analyst and head of corporate sector at Global Credit Ratings‚ Eyal Shevel.
SA’s construction industry has struggled to grow since its boom prior to the 2010 Soccer World Cup. Various analysts have earmarked the last quarter of 2013 as the time to expect earnings improvements in the industry.
Shevel said however that while earnings would improve later this year because the construction sector had worked through many loss-making contracts‚ strikes and currency effects‚ strong returns comparable to 2010 would only materialise in around two years from now.
“I have been looking at order books of various companies for a while but I just do not see good growth out of SA‚ Africa yes‚ but SA‚ no‚” he said.
Shevel made the comments following Global Credit Ratings releasing an update on JSE-listed construction group‚ Basil Read.
“Global Credit Ratings has affirmed its national and long term ratings of BBB+ and A2 respectively of Basil Read. The rating outlook in turn is stable‚” he said.
In the year to December‚ Basil Read recorded an operating loss from continuing operations of R171m‚ a plunge from 2011’s R205m profit. Two-loss making contracts harmed the group.
Shevel said the contracts fell apart for reasons mostly beyond Basil Read’s control. He said Global Credit Ratings had decided to maintain the rating at the current level‚ despite the losses incurred in the 2012 financial year‚ to reflect the much stronger financial position of the Basil Read following the sale of the TWP engineering group.
However Shevel added that Global Credit Ratings had downgraded the rating downgrade in 2012 in anticipation of the worsening environment.
“There is general risk in the construction industry related to how long it takes for clients to pay companies and so forth. This is why we have liked to see listed companies take on smaller‚ simpler civils contracts worth say R500m and not massive R20bn contracts‚” he said.
Until the government deploys tenders for its large infrastructure spend‚ the best route for construction companies may be to work cross border into Africa. Avior analyst Dirk Noeth said he was interested in Group Five’s order book which crossed various continents.
Some analysts are more optimistic that construction companies will bring strong profit improvements to investors sooner than years from now.
“I think a recovery in earnings will only take place in 2014. I would start looking at construction stocks’ earnings from the third quarter of 2013‚” Afrifocus analyst Hugan Chetty said.