Despite accusations of anti competitive behaviour, recent results show that big players in SA's construction sector haven't kept all the spoils of the infrastructure boom to themselves. Small-cap companies are holding their own.
Recently, Sanyati, Protech Khuthele, Mazor, Afrimat and the slightly larger Esorfranki recorded results that show the companies' resilience in the face of the recession.
With revenue rising 76% to R1,02bn in the six months to August, Esorfranki leads the pack.
Andries van Heerden - Reduced residential exposure
Two strategic acquisitions boosted the company's balance sheet: last year, it diversified from its focus on geotechnical work to a civil engineering and construction group, and acquired Patula and Shearwater's civils and pipeline groups.
Revenue from its geotechnical division dropped 9%, highlighting the value of the diversification. This has come as much of the private-sector work has dried up.
Mazor's six-month-to-August results show revenue of R180,2m, up 46% on the previous year, while Sanyati posted revenue of R1,15bn, 42% higher on the same period last year. Protech Khuthele's interim revenue to August rose 24% to R426m.
The results show the effect that government infrastructure spending has had on the construction sector and also indicate the companies' level of market exposure.
The slowdown in private-sector spending has hit the sector hard and this situation is expected to continue in the short term. This has made strategy more important than ever. Afrimat, for example, deliberately reduced its exposure to residential property - before the recession and before its severity was apparent.
CEO Andries van Heerden says the company took steps to refocus on government infrastructure and away from private-sector investment as a whole. Afrimat's revenue rose 21,2% to R392,5m in the six months to August. Its earnings are stronger than they were, even before the recession, says Van Heerden.
Esorfranki's acquisitions helped it service government infrastructure. It has secured work on the Kusile and Medupi power stations, as well as road construction projects.
Despite the sector's strength, recorded earnings have not inspired as much confidence as they did a year ago.
Expectations of the sector were high last year, says Trident Capital analyst Shawn Stockigt, and construction stocks were expensive. Companies were trading on a p:e of up to 15, but the recession has put earnings expectations under pressure and multiples have dropped considerably. This has made parts of the sector, including small-cap firms, look cheap.
Stockigt says lower p:e ratios mean that it may be time to buy, but with caution. This risk could reward shareholders handsomely, he says.
And though there is less certainty about companies' future performances, Stockigt says concerns about order books beyond 2010 have already been priced in.
However, high margins are not a standard feature across the sector and some companies have expressed reservations about growth.
One of the constraints is having government as a client. The construction business has fallen victim to slow payment from government and state-owned enterprises. Smaller contractors are more vulnerable to late payment.
More positively, government's infrastructure commitment will provide the sector with considerable work. Aside from Eskom and Transnet's spending, it will continue its building programme, though at a slower pace.
Van Heerden believes construction activity will move out of Gauteng after the soccer World Cup. He expects it to take on a strong rural focus - on roads, low-cost housing and water infrastructure. Government's funding problems, he believes, won't stop it from pursuing this work.
Recent commitments to further increase infrastructure budgets means the outlook for small players in SA's best-performing sector is healthy. And when private-sector work returns, the picture is expected to get even prettier.
Ranking the Analysts 2009
