Despite the changing political landscape in South Africa, the construction industry, which has been in the doldrums over the last 24 months, will not immediately experience a change in fortunes, warns Wilson Bayly Holmes-Ovcon (WBHO) CEO Louwtjie Nel.

“Government has lots of obligations. We won’t see any big projects soon”.

However, an increase in fixed investment arising from renewed business and investor confidence, together with added public spending should the economy improve, could only serve to benefit the construction industry in the long run.

“We have confidence we have reached the bottom of the cycle,” said Nel.

WBHO on Tuesday showed that it continued to outperform the struggling South African construction industry.

The group reported a 67.6% increase in operating profit, to R485-million, for the six months ended December 31, compared with the same period in 2016.

Revenue improved by 17.3%, to R18.1-billion, and consisted of 29% growth in Australia following the award of a number of large‐scale projects, 64% growth from the rest of Africa owing to increased activity in Botswana and progress on mining infrastructure projects in Ghana, Guinea and Burkina Faso, and a 6% decline in revenue from South Africa, partly due to a retreating building market.

The increase in profit was associated with revenue growth in Australia and within the Roads and Earthworks business. This was, however, diluted by lower profitability from the Building and Civil engineering division, as building revenues contracted and margins came under pressure.

The group margin declined from 3.1% to 2.8%.

The contribution to group revenue from Australia increased from 56% to 61%, with South Africa and the rest of Africa contributing 31% and 8% respectively, compared with 38% and 6% in the comparative period.

The profit contribution from Australia improved from 22% to 28%, with South Africa contributing 53% of profit and the rest of Africa 19%, as opposed to 61% and 17%, respectively.

WBHO’s expansion into the UK has not yielded profit yet. The Byrne Group, in which WBHO holds a 40% share, earned R1.1-billion revenue for the period under review, but suffered a R68-million operating loss.

WBHO said the volume of work was insufficient to cover the Byrne Group’s overhead costs, with this situation compounded by additional restructuring and retrenchment costs. The award of key projects should improve operating performance, but further restructuring costs were expected.

Nel said the group remained concerned about the effects of Brexit. However, the recent collapse of UK construction giant Carillion might provide smaller groups the opportunity to gain market share.

Oversupply of Shopping Centres
Revenue at the Building and Civil Engineering business declined by 9.6%, to R3.9-billion. Operating profit declined from R217-million to R169-million.

WBHO said the impact of contracting building markets had become noticeable, after a number of years of consecutive growth. The contraction was felt most keenly in Gauteng, where revenue decreased by 19%, owing largely to minimal order intake from the retail sector, due to an oversupply of shopping centres, the poor state of the economy and over‐indebted consumers.

Commercial office developments constituted the bulk of activity in the sector. However, a number of commercial buildings were being constructed without any tenants.

The building market will shrink, said Nel. “We’ll do well to maintain our business.”

Civil engineering markets remained depressed.

The Roads and Earthworks business saw a 33.6% increase in revenue, to R2.8-billion, with operating profit up from R144-million, to R190-million.

Locally, the road sector remained the dominant source of activity, providing 46% of South African revenue.

In Australia, revenue grew by 28.7%, to R11.1-billion, with operating profit up from R101-million to R143-million.

The growth in Australia was underpinned by strong activity within the building businesses, as well as moderate growth within the infrastructure business.

The overall margin performance from Australia remained below expectations, however, owing to an under‐performing building project in Sydney.

WBHO’s Construction Materials business experienced an 8.3% decline in revenue, to R397-million, while operating profit increased marginally, to R10-million. The group said trading conditions within the steel supply market remained difficult.

Order Book
The group’s order book at December 31 increased by 17%, to R52-billion, up from R45-billion at June 30, 2017.

The Building and Civil Engineering and Roads and Earthworks divisions’ order books were largely in line with the level
achieved at June 30, 2017, while the Australian order book grew 23%, from R32-billion to R39-billion.

In the UK, the Byrne Group secured an order book of £111-million.

Sanral
The South African Roads Agency Limited’s (Sanral’s) proposed new procurement requirements, which stipulated 51% black ownership for prospective bidders, remained of concern for the large industry players, “particularly listed companies with limited influence over its shareholders”.

WBHO continued to engage with Sanral on the matter, said Nel.

He hoped Sanral would soften its stance, allowing WBHO and other construction companies a “period of time” to again meet the 51% requirement.

The end of an empowerment scheme at WBHO had seen the group drop back under the 51% mark.