While the construction industry is notoriously cyclical, the current mix of a depressed South African economy, high levels of national debt and low infrastructure spending is proving toxic as contracts dry up.
Wednesday 13, March 2019
(Bloomberg) --South Africa’s construction industry is being demolished.
After 45 years of trading on Johannesburg’s stock exchange, Group Five Ltd.’s stock was suspended Tuesday after the company filed for bankruptcy protection, making it the fifth local builder to enter business rescue in less than a year.
From a peak market value of ZAR 8.2 billion ($575 million) in 2007, it was worth less than ZAR 100 million when the shares stopped trading.
Marc Ter Mors, the Head of Equity Research at SBG Securities, said, “Those construction companies that are South Africa orientated have gone from bad to worse in the past 12 months.”
“In South Africa, volumes are low, pricing is under pressure and companies are taking on more risk to win contracts, so margins are thin and that hits cash flow, there are no real segments to hide in, added Mors.
At risk are thousands of jobs -- including 8,000 at Group Five alone -- in a country with an unemployment rate of above 27 per cent.
Additionally, Murray & Roberts Holdings saw the writing on the wall. Having built significant South African landmarks such as Johannesburg’s Carlton Centre, the continent’s tallest building, the company sold its building and infrastructure units in 2016 to focus on international businesses focused on projects such as underground mining and oil and gas.
While M&R’s market valuation is a fraction of what it once was, the stock has gained 44 per cent in the past year amid takeover interest from 40-per cent shareholder Aton GmbH.
Last month, South African President Cyril Ramaphosa said that government’s infrastructure spending had slowed, he also said the state will contribute ZAR 100 billion into a fund over 10 years. The plan is to use this to get financing from both private and state-owned companies to reboot the industry.
In the meantime, the FTSE/JSE Africa Construction & Materials Index is down 27 per cent in the past 12 months, compared to a six per cent drop in the FTSE/JSE Africa All Shares Index.
There is also risk that if South Africa’s local construction industry is wrecked, future building projects will become more expensive, Ter Mors said.