Steps toward economic reform, greater accountability for public sector officials and intent to get the economy on track again appear to have gathered momentum in recent weeks. One of the beneficiaries potentially sitting in the sweet spot of all three factors is the construction industry, which has endured a torrid decade.
After the 2010 Fifa World Cup stadium and infrastructure projects, order books in South Africa began to shrink and an oversupplied construction sector was quickly pushed to find alternative options to fill existing capacity. As the decade rolled on, a combination of the downward part of the commodity cycle, a lack of African infrastructure spend, stalled Middle East projects and cut-throat competition for contracts pushed construction firms to the brink.
Some, like Group Five and Basil Read, ultimately capitulated and entered business rescue in the face of project contract fines and an industry-wide liquidity crunch. Listed sector representatives in which to invest dwindled to a few.
2021, by contrast, has offered glimmers of hope as roads agency Sanral begins opening the taps on road construction spend, mines move to re-engage in postponed maintenance work, and the government announced an unexpected increase in the nonlicensed private electricity generation cap to 100MW.
Chronux Research analyst Rowan Goeller says Sanral is back in gear after years of not spending its allocated budget. The tenders being awarded – including by provincial and local municipalities – are up to multi-billion rand in size, including for some national roads. “These are some big jobs, which only the largest listed and unlisted players have the balance sheets to take on. You can see it in Raubex’s order book, which is effectively full. They’re not chasing work at the moment because they already have two to three years of visibility, which they haven’t had in many years. If Raubex can pick and choose the projects it takes on, that should lead to decent margins.”
Ninety One portfolio manager Andrew Joannou agrees that the Sanral work will be significant for Raubex. “Off the base they were at, it is meaningful, and they will be the major beneficiary. The side of the business that deals in aggregates, building supply, bitumen and asphalt will also benefit. Even the airport construction work that was stopped by Covid19 must return – preferably when all companies are at full capacity and Raubex can command higher margins,” he says.
The raising of the power generation cap is significant, Goeller says. “Previously the only private sector involvement was companies like Reunert installing solar panels on roofs and in parking lots, which is not large construction work. A 100MW power plant is full utility scale. There is a dual business case for building larger plants: to lower electricity costs and to move in line with increasing global scrutiny on environmental impact and carbon footprint. South African businesses have, until now, by default been held hostage by Eskom’s embedded fossil fuel liability,” says Goeller.
Rowan Goeller Chronux Research analyst
Andrew Joannou Portfolio manager at Ninety One
Another upside for such power utility builds will be that the lenders involved will want to avoid risk and will likely appoint listed players as construction partners. “Private sector customers will be good customers providing a steady revenue stream, rather than the stop-start nature of much of government infrastructure projects. I have no doubt many sites around SA are already being measured for their solar and wind generation potential and will then be marketed to corporates as an off-the-shelf solution to their power needs. It can all happen relatively quickly,” Goeller says.
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