International infrastructure group Aveng unveiled a mixed bag of results for the year ended June 2012, with key figures pointing to a stagnant local construction sector. Although the group’s order book rose by 27% to R47bn – helped by a number of contracts in the oil & gas sector through the McConnell Dowell (“MacDow”) order book – the South African public sector makes up a dismal 3.6% of this figure (having reduced from 10.5% of the order book in 2010). The local order book fell by a whopping 20% to R6.5bn year on year. Aveng made a point of highlighting this sharp decline in local infrastructure spend, with CEO Roger Jardine lamenting the fact that although the group is “Proudly South African and eager to contribute to local growth and development,” muted Government spending on construction is making it very difficult for Aveng to fulfil this role.
“Since 2008, the South African Government’s public infrastructure spend has decreased significantly,” the group stated. “Despite ambitious plans announced by Government in the 2012 National Budget totalling R844.5bn, we have not seen this impact on our order book…”
According to Frost & Sullivan’s Environmental & Building Technologies research analyst, James Milne, bureaucratic inefficiencies are the major contributing factor to the current low expenditure levels by local government.
“Major infrastructure initiatives are prone to significant delays, both in actual project implementation and in releasing payment to companies involved in such projects,” explains Milne. “The latter issue has led to construction companies becoming particularly wary of engaging with Government on large projects.”
Although buoyant during the group’s results presentation on 5 September, Jardine later admitted that the SA construction sector was “the elephant in the room” and a major factor behind the group’s disappointing 58% decline in headline earnings to R495m.
“We operate in over 30 countries and would definitely like to see more work in our home market,” he said.
ELECTUS equity analyst, Gustav Schulenburg, points out that Aveng is not really about SA anymore, as more than half its order book is in Australasia. Unless local spending picks up, this trend will likely continue as major construction groups seek more profitable horizons.
Jardine tried to remain optimistic on the local front, however, saying that “strategic infrastructure projects will happen, it is just a matter of when”. He emphasised that spending on this front is “critical to where the country is headed”.
Milne believes there’s indeed reason for optimism, saying that a number of major economic indicators that are closely aligned to domestic construction performance (such as GDP growth, residential and non-residential investment and civil construction investment) have all begun to show signs of turning the corner from years of decline and poor performance.
Schulenburg, however, cautioned about being over optimistic about local spending picking up anytime soon, with construction getting less of the public spending pie than groups like Aveng would hope for.
“There might be some misunderstanding around public spending,” he explains. “Government’s forecast spend is around R800bn, but if you break it down, R250bn is allocated to Eskom; R300bn is for Transnet; and R70bn has been allocated to roads. Many tend to assume that this infrastructure spend will filter down through to construction, but if you take Transnet, for example, only a small portion of that project will be construction-related spend.”
In addition to the underperforming local sector, the group’s results were also negatively impacted by a provisioning (of an undisclosed amount) for a possible fast track settlement with the Competition Commission, relating to alleged “collusive dealings”. Jardine spoke extensively about the group’s efforts to stamp out unethical practices, saying that the “entire industry is susceptible to issues of corruption and is mired in anti-competitive behaviour, but we are working hard to stamp this out – not only in the group, but in the sector.”
There are also some looming challenges on the global front. Desmond Reilly, portfolio manager at PSG Konsult, warned that because Aveng has large exposure to the resource industry, it will be at the mercy of the slowing Chinese economy. All of these factors will require that investors show some patience when looking to cash in on the construction sector.
“The share does offer value at current levels, but with the economic challenges ahead and the cyclical nature of the construction sector, investors who are looking to buy might need to have a longer-term view in order to reap their rewards,” adds Reilly.
Group revenue increased 19% to R40.9bn, and the group has net cash of R3.9bn – declaring a dividend of 60c per share.