The construction industry in South Africa has had a rough few years. First of all, work dried up quite a bit after the World Cup boom. Although government has extensive plans for infrastructure development, it has been slow to actually spend the allocated money, and so the government side of the construction business has been fairly slow. On top of that, the fall in house prices that followed the 2009 recession led to a slump in new home building, which further reduced the industry’s available jobs.
Second, there was the Competition Commission investigation of collusion and misbehavior in the industry, and the associated fines levied against most of the big players in the business. These fines not only cost the companies a packet, they also damaged the industry’s reputation and led to slumps in stock prices.
Overall, then, it’s been a rough business to be in for the last few years. However, things may be turning around after a long drought. – FDÂ
ALEC HOGG: Stefanutti Stocks is part of all of that. It reported full-year results with a decline in its headline earnings per share. The CEO, Willie Meyburgh joins us for a close look at those numbers. Willie, before we started talking, during our break you were saying it’s been two tough years and anyone looking at these financial results would clearly see that your operating margin is down to one-point-nine percent. That’s like R1.90 for every R100.00 worth of business, but you do feel that you’re putting things out of the trough.
WILLIE MEYBURGH: We’ve been through a very tough time over the last two years, especially in our building business units. As recently as two-and-a-half years ago, we took on projects at low margins, at very tight time schedules, and unfortunately, we didn’t perform well. Those projects stayed with us for two years now, and over the last year, we made an active effort to make sure that those projects are now behind us. For the first time in two years, I’m comfortable saying those projects are out of it.
ALEC HOGG: It’s as if the bad food in the larder has been dispensed with, it’s all nice and clean, and better than one-point-nine percent margins one expects.
WILLIE MEYBURGH: Yes, I think so because if you do look at our other business units…if you look at structures, they still produce a good four-point-nine percent operating margin. In this market, we think it’s quite good. In terms of our roads, pipeline and mining, they produce an operating margin of seven-point-eight percent. The MEP (mechanical and electrical) last year, had a R51m loss. This year, they showed a very small profit, which included a loss in power, and power we scaled down to a much smaller business. In building, where we had the problem areas in the divisions in Mozambique and inland, we have settled those businesses down, we’ve made some structural changes as well as some management changes. I can state quite categorically, that the Maputo business has turned around. The current projects are making money. We’re busy turning the inland business around. We have some issues we need to deal with as well as a couple of places in terms of claims we need to settle. We have taken those losses. We have engaged with the clients in a positive way and they want to resolve the issues, too.
ALEC HOGG: Claim? Is this the Competition Commission…?
WILLIE MEYBURGH: No, it’s where you have certain compensation events, which you need to recover from the clients for example, where there was late information or late access, you incurred the costs and you’re trying to recover the costs from the clients. With some of those clients, it takes much longer than with other clients, but at this point in time, we are in positive discussions with our clients to resolve them. To date, we’ve taken the cost on those projects.
ALEC HOGG: Gugu, it sounds as if there’s a lot of juggling going on here. Maputo here, Civils there, and pipelines there.
GUGULETHU MFUPHI: Exactly. What interest me is that you’re scaling back on your power. So often, when Alec and I discuss that that is often seen as a great opportunity. Why scale back on that?
WILLIE MEYBURGH: We don’t see that opportunity because power is really power lines – power line distribution. Over the last two years, very few tenders came to the marketplace. Because of that, we actually lost money and there’s no way we would stay in that market if that continued to be the case. That’s why we scaled it down, and we look at other options going forward to see. If that market picks up – fine, we’ll keep it there. If not, then we’ll scale it down.
ALEC HOGG: It was interesting to read in the detail in your results where you say that ‘government tenders remain scarce’. We were under the impression every time we talk to a Cabinet Minister or listen to our President here in South Africa, that infrastructure programs are going ahead at full-tilt.
WILLIE MEYBURGH: I don’t think they’re lying to you.
ALEC HOGG: Thankfully.
WILLIE MEYBURGH: They’re not lying to you. There’s just not enough. We have recently been awarded a number of marine projects worth more than R700m. We have been awarded (okay, that wasn’t in South Africa) in Zambia, some growth projects worth very close to R1bn and we’re expecting more. We are doing some hospitals. We’re doing some school projects, but there’s just not enough coming to the marketplace.
ALEC HOGG: But there’s supposed to be R860bn over the next three years – that’s what Pravin Gordhan tells us in the Budget. Who’s doing the work?
WILLIE MEYBURGH: Yes, I think they’ve now changed the three years to 15 years.
ALEC HOGG: Did they change it to 15 years?
WILLIE MEYBURGH: At the latest, it’s 15 years. They were going to roll it out over 15 years.
ALEC HOGG: That’s a big change.
WILLIE MEYBURGH: If you look at projects like the PRASA station upgrades, those projects started to come to the market as well. They are in excess of R2bn. They’re nice projects. There aren’t many of them, but it’s more work to the market. The problem is that there’s not enough of that coming to the marketplace, plus the fact that the mining companies are not spending on their capital programs, especially on mining infrastructure work where we’ve been very active a couple of years ago. There’s little of that work coming to the market but even so, we manage to grow the order book. Our order book in February last year, was R8.5bn. We gradually managed to grow it at reasonable margins – better margins – not fantastic, but better margins and it now sits at R12.8bn.
ALEC HOGG: It sounds to me as though you’re talking to shareholders at the moment, by giving us a more positive picture. Are the shareholders going to watch this discussion and say ‘Stefanutti hasn’t done that well over the past couple of years, but I’m excited about the potential into the future – is the CEO feeling that way’?
WILLIE MEYBURGH: Alec, I can just tell you the truth. That’s how we feel. We can see that the market hasn’t changed dramatically in terms of work around. We managed to grow the order book – a better quality order book. We have pockets in our business that do very well. Building dropped us. They didn’t do well at all – R150m loss for a year, of which R90m was in Mozambique.
ALEC HOGG: Your share prices has been in a channel and it’s just been going down, down, down, and you’re at a stage now where I guess at some point, you have to hit the bottom. Do you feel that you’ve gotten there from an operational perspective?
WILLIE MEYBURGH: I feel strongly that we have hit the bottom and as I said earlier, for the first time we turned the business in building and so far, that has been our Achilles heel.
GUGULETHU MFUPHI: Well, should shareholders believe you, given the fact that we’re in a sluggish economic environment?
WILLIE MEYBURGH: Well, we can only do by proving in this financial year, that we’ve turned the business. For two years now, we’ve been saying that we’re going to turn, but we have now turned the business. We’ve taken the losses in the places where we faltered. We have now taken that to book, we’ve put the loss-making project behind us, and it’s going much better in building.
GUGULETHU MFUPHI:Â Is Africa the next growth story?
WILLIE MEYBURGH: Well, our turnover from Southern Africa is currently 22 percent of the turnover. We see that going forward to at least 30 percent work in Zambia, Swaziland, Mozambique, and Namibia.
ALEC HOGG: What about foreign competitors? We saw a few coming in the past: the Brazilians arrived and left very quickly but more recently, particular with the Esorfranki deal, it does look as though foreigners are certainly looking to the South African market in other sectors. Are they coming for construction?
WILLIE MEYBURGH: In the construction in South Africa per se, we haven’t seen many foreign contractors. For example, in Botswana, over the last two months, we priced on a number of projects against the Chinese and we were beaten hands-down. In the rest of Africa, it’s therefore quite difficult in the public sector, to compete against the Chinese contractors. In South Africa however, we haven’t seen many foreign contractors, including Chinese. It doesn’t mean foreign contractors won’t be here – I think the market must allow that – but South Africa is very regulated. The construction industry doesn’t make a lot of money, so if you’re here and you don’t make a lot of money, and you come from a foreign place it’s going to be a nice challenge.
ALEC HOGG: So you haven’t seen the Chinese competing with you on public tenders.
WILLIE MEYBURGH: In S.A.
ALEC HOGG: In S.A. Are they just not here? Are they not tendering? Are they tendering poorly?
WILLIE MEYBURGH: We haven’t seen them tender against us in the public sector and in the private sector, it works on an invitation basis where clients invite you to tender, and we haven’t seen that yet.
ALEC HOGG: The Chinese Competition Commission might say ‘what’s this invitational thing’. Anyway, Willie, I’m just kidding.
WILLIE MEYBURGH: That’s the client’s prerogative.
ALEC HOGG: It’s a sensitive subject, I’m sure, when one talks about competition and the construction sector, but it’s nice to see that Willie Meyburgh is looking a little more upbeat than when he was last in this studio. They aren’t the greatest results, but results that are he feels, at the trough. The share price has to turn around some time. Maybe this is it. He’s the Chief Executive of Stefanutti Stocks.
