Mixed outlook for infrastructure players
Category Company News
Companies find themselves at a midpoint. An improved outlook for firms that cater to the infrastructure market has already been priced into their stock. But large contracts have still not materialised.
After three years of little new public or private-sector work, the industry’s competition levels are extremely high, eroding profits. Over the past few months, investors have purchased building and materials stock based on what is to come.
But even with a better outlook and government’s expected infrastructure programme, contracts that were priced at low margins during the worst of the construction sector’s recession still feature in order books.
However, some firms have begun to detect a difference. Basil Read CEO Marius Heyns says there is a definite change in pricing. He says Basil Read has begun to work loss-making contracts out of its book.
Heyns says there is no shortage of work, particularly from the SA National Roads Agency, municipalities, the Trans-Caledon Tunnel Authority and mining companies.
The company has two years of work on its order book, and Heyns believes it’s in a better position compared with others.
However, Murray & Roberts CEO Henry Laas says the construction market in SA has not improved. Aggressive pricing and limited opportunities have made it a difficult sector to be in.
He says the mining sector and the Australian market, where M&R operates, offer better opportunities and outlook.
The beleaguered roads sector is also a difficult place. Because it’s one of the few sectors still offering work, contractors have flooded in, driving up competition. Profits of road builders such as Raubex have slumped.
Also affected by excess supply, cement producers have reacted by reducing prices at a time when profit margins are already low. However, sales in the sector have increased by 10% for the five months to February, increasing optimism.
In anticipation of high infrastructure spend over the next few years, investment in new and existing plants will boost cement supply. Coupled with new entrants to the market being expected to begin production by 2014, the outlook for existing producers like PPC, Afrisam and Lafarge is mixed.
But optimism about future investment has increased. Stefanutti Stocks CEO Willie Meyburgh says: “Mining and petrochemical infrastructure projects, and developments in renewable energy, are beginning to show promise. We are seeing signs of a slight recovery in the construction sector and are optimistic about government’s commitment to spend on infrastructure.”
Key to this is the sector’s expansion drive beyond SA’s borders, as well as diversification.
Acquisitions have already played an important role in the fortunes of companies like Basil Read and Afrimat. Basil Read’s acquisition of engineering firm TWP in 2009 was criticised by analysts at the time, but proved to be a game-changer for the company.
Afrimat’s purchase of the Glen Douglas metallurgical dolomite mine was a key reason for its annual results being way ahead of the entire industry. But the environment is also different, with the nature of projects changing.
Afrimat CEO Andries van Heerden says projects are smaller and more geographically scattered. Compared with 2007, when a road project worth over R800m would frequently come to market, tenders are now closer to R100m.
Bigger companies are still banking on large capital expenditure. Government’s capex programme lists high-profile mega projects. But even then, returns or project scale are unlikely to beat the heady days of 2006 and 2007.
Author: Warehouse Finder
