Although the market capitalisation and financial performance of local construction industry participants have declined over the past financial year, professional services firm PwC on Tuesday said some construction companies have since experienced an improvement in profitability.

Despite ongoing pressure on margins, lower revenue and lower order books, there has been some improvement in companies’ performance as the year draws to an end, with signs of an increase in profitability and market performance, PwC assurance partner Andries Rossouw noted in a release.

PwC’s ‘SA Construction 2016’ report highlights some of the trends in the South African construction industry. The study’s findings are based on the financial results of the leading construction companies listed on the JSE for the financial year ended June 30, 2016.

Seven of the nine companies covered in the report reflected a decrease in market capitalisation. In aggregate, for the nine companies analysed, market capitalisation decreased by 3% to R25-billion as at June 30, but after June 30 there was a market capitalisation recovery of 11%.

Actual government construction expenditure increased by 5% in 2015, with total expenditure amounting to R258-billion. A promising development for the industry is the government’s infrastructure plan, which aims to address South Africa’s needs over the next few years. However, this will require input from and coordination with the construction sector for it to be successful.

The private sector is also a significant contributor to capital expenditure (capex) in the construction sector, with the mining sector being one of the biggest players. However, owing to severe pressure in the sector, with shrinking margins as a result of volatile commodity prices, exchange rate fluctuations and labour unrest, there has been a decline in demand from this sector.

The secured order book has been declining since 2014. A decrease in order books was observed across six of the nine construction companies analysed. The secured order book cover of 1.5 times current-year revenue for 2016 showed a marginal increase on 1.24 in the prior year. The increase was as a result of an even bigger decrease in revenue.

INDUSTRY FINANCIAL PERFORMANCE
Total revenue decreased by 9% to R117.4-billion on the prior year mainly as a result of a decrease of R9-billion from Aveng, a R3.9-billion decrease from Murray & Roberts and a R900-million decrease from Stefanutti Stocks, partially offset by a R1.9-billion increase from Wilson Bayly Holmes-Ovcon and R500-million at Raubex.

These decreases were largely as a result of the weaker economy, in particular for commodity markets with a notable decrease in revenue from energy, oil and gas projects. Disposal of noncore businesses also contributed.

Total operating costs decreased considerably by 12% in response to lower revenue. Staff costs continue to represent a significant component of operating costs, constituting 29% of total operating costs. A number of retrenchments took place in the industry this year as construction companies could no longer maintain their staff investment.

Cash generated from operations decreased by 23% year-on-year to R3.4-billion. It is positive to note that the solvency and liquidity ratios continued to remain reasonably strong and in line with those of the prior year at 1.8 and 1.3 respectively.