Johannesburg – The delay in the government's planned infrastructure programme and the finalisation of World Cup projects have left the construction industry with an epic hangover.
However, this a only a temporary lull and construction stocks are expected to make a full recovery, analysts said.
The FNB Civil Construction Index reported last week that business confidence is at an all-time low as delays on Eskom's power station programme and other infrastructure projects affected the amount of work available in a more competitive domestic industry.
FNB chief economist Cees Bruggemans said confidence in the building sector is dropping and will continue to do so until government steps in and embarks on its planned R845bn infrastructure roll-out. The civil industry obtains 88% of its work from the government sector.
"I used to say 'there is life after the World Cup', but I got to the stage now where I say 'well, let's see it then'," said
Esorfranki [JSE:ESR] CEO Bernie Krone. "The World Cup has been a bigger stumbling-block than people anticipated."
Krone said the six-week holiday will have a material effect on Esorfranki's bottom line, as was warned at the group's results presentations earlier this year.
A positive spin-off from the tournament was the fact that it gave construction firms a deadline. With the event now behind us, there might a lack of impetus to commission and finish projects.
According to Warren Dick of Investorcentre, the construction industry will enter a lull in the short term.
"The momentum will come from government and parastatals."
This view is shared by Shaun Le Roux from Alphen Asset Management. Commenting in a note to clients on Monday, he said: "The differentiating factor of the World Cup-related projects has been the degree of urgency. Whereas the average government and parastatal project has and will continue to be subject to inevitable delays in specification, award and execution, the World Cup projects had strict FIFA-imposed deadlines; they had to be done on time."
Le Roux went on to say South Africa needs to prepare itself for a post-World Cup hangover and not to expect infrastructure spend to carry on as it had before the event.
"Unfortunately, there is less money than previously in the kitty to fund the very necessary projects in power, transport, housing, health and education," he said.
Opportunities with Eskom and in Africa
Two potential drivers for the bigger construction firms like
Wilson Bayly Holmes - Ovcon [JSE:WBO], Murray & Roberts Holdings [JSE:MUR] and
Aveng [JSE:AEG] is that they can take advantage of less competition and higher margins in countries in Africa and the Middle East, and look forward to opportunities presented by a massive capital expenditure program linked to power utility Eskom.
"In the bigger scheme of things, the World Cup was not the be-all and end-all for construction firms," said Francois du Plessis of Vega Asset Management.
"Eskom will be a bigger job by far."
Almost 35% of Murray & Roberts' revenues were derived from operations outside South Africa. Aveng made 46% and WBHO and
Group Five [JSE:GBF] over a third of their turnover from foreign operations
While the opportunities might be there, stockbrokerage Imara SP Reid recently reiterated its "hold" recommendation on Murray & Roberts.
The firm advised shareholders: "We are worried that the R40bn order book is heavily weighted to major domestic long-term public sector projects (at interim stage 2/3 of the R44bn order book was exposed to the SA public sector), which have slowed drastically with 2010 FIFA World Cup reaching conclusion while the government hiatus on announced spending plans post-2010 continues."
Meanwhile, smaller companies are already moving into the domestic service delivery sphere.
"A recovery is on the cards if you take a three- to five-year view," said Dick when asked about opportunities for the construction plays.
- Fin24.com