Murray & Roberts is exiting infrastructure and building markets in SA as years of stagnation take their toll. It will also dispose of its steel and engineering services group, as it focuses on global underground mining, oil and gas, and power and water.
It is fairly easy to pin down the reasons for the company’s change of tack. Government spending on major infrastructure projects has been almost nonexistent since the holding of the 2010 Soccer World Cup. There has also been concern over Chinese construction companies potentially garnering billions of rands of infrastructure work in SA — the Moloto rail development corridor between Gauteng and Mpumalanga is one such project — at the expense of local firms.
The decision to exit these sectors follows announcements by Murray & Roberts of its “new strategic future”.
“By 2020, we aim to be a leading diversified international project engineering, procurement and construction group in selected natural resources sectors and supporting infrastructure,” the group says.
This comes amid crises in the domestic and global mining and steel industries. SA’s construction sector takes up about 50% of local steel production. But the closure of the country’s second-largest steel maker, Evraz Highveld Steel and Vanadium, and recent record losses at SA’s largest steel group, ArcelorMittal SA, are testimony to hard times.
“We are not exiting the South African market — it is about exiting a sector,” says Murray & Roberts CEO Henry Laas.
The exit by Murray & Roberts from infrastructure and building markets comes as diluted continuing headline earnings per share fell 10%, according to the group’s provisional report for the year to June. Attributable earnings in the period dived 15% to R753m from R881m a year earlier.
The poor state of the political economy has added to woes caused by the aftermath of the global financial crisis. Fifteen construction companies are paying a collective R1.5bn in fines to competition authorities for alleged industry collusion. Not all companies have acknowledged charges. But amid perceptions by the government that it got taken for a ride during the World Cup build, the construction industry has been put through a grinder.
Along with plunging market capitalisations and bad blood with the state, the construction industry is pressured over empowerment, including through state procurement legislation. Meanwhile, in recent years there have been serial occurrences of violent strikes in mining, metals, and at Eskom’s new power stations.
At the same time, the government has exempted the use of imported steel for building large infrastructure, while not designating local steel for this task.
The proposed disposals in the sector have opened up opportunities for black economic empowerment in large-scale infrastructure development.
But this comes as the latest results from four of SA’s largest listed construction groups — Aveng, Group Five, Murray & Roberts and Wilson Bayly Holmes-Ovcon (WBHO) — show that offshore income is critical to core sustainability.
WBHO’s building divisions in SA and Australia offset lower activity levels in mining and other civil engineering sectors. This helped push headline earnings per share up 11% in the year to June. Revenues rose 6.3% to R30.7bn. CEO Louwtjie Nel says he sees an uptick in state spend on larger-scale infrastructure projects in SA.
But he also says the group’s civils work in SA is down 40% year on year, while road-building fell 18% in the period.
Aveng, the country’s largest construction group by turnover, says domestic building and engineering work will contribute 37% of pipeline projects for the next two years, compared to 56% in 2015. The company saw revenue plunge 23% in the year to June, showing a headline loss of R299m from a R578m headline loss in June 2015.
The group says Australia and Southeast Asia will play an increasingly important role in future. The region now accounts for 60% of its two-year order book, up from 40% previously.
In the past financial year, it has struck 8,500 workers from its payroll, including about 2,000 permanent staff.
Group Five, meanwhile, more than doubled core operating profit in the year to June. But this was almost entirely as a result of its toll road concessions in Eastern Europe. CEO Eric Vemer says government spend on infrastructure projects is the key to a recovery in heavy construction in SA.
source: Business Day