South Africa’s construction industry faced a challenging year in 2014, fraught with labor unrest, substantial delays on some of the country’s major construction projects, as well as recent setbacks in the economy.
“The 2014 financial year started with a lot of promise despite adverse findings by the Competition Commission and various challenges to the industry,” says Andries Rossouw, PwC Partner. Order books were strong and margins were recovering for the first time in five years. However, the lack of recovery in the economy meant that this promise was not fulfilled and 2014 proved to be a tough year for most construction companies.
Rossouw says: “The past few years have highlighted the need for better coordination and monitoring within the construction industry – a challenge that the South African Government has welcomed with the roll-out of its National Infrastructure Plan. Implementation of the plan will require significant input from the construction industry.”
PwC’s second edition of ‘SA Construction’ 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 and construction materials companies listed on the Johannesburg Stock Exchange (JSE) for financial year ends to June 2014.
The South African construction industry
The construction industry is cyclical in nature. However, the 2014 market capitalization of the heavy construction and building materials & fixtures companies saw mixed results. Ten companies reflected an increase and five a decrease. In aggregate, for the 16 companies analyzed, market capitalization had slightly decreased to R67.4bn as at 30 June 2014 (R68.1bn as at 30 June 2013).
The market capitalization of the 16 companies had decreased further after 30 June 2014 and as at 30 September, 2014 had declined to R66.3bn (a 1.6% decline in market capitalization over the three-month period).
The Government’s ongoing National Development Plan and its continued commitment to public infrastructure investment of R847bn over the next three years are positive signals for future growth in the industry.Actual government construction expenditure in 2013 was R12.7bn below the 2012 forecast. This decrease in anticipated expenditure underlines the challenges experienced by the industry.
Actual government construction expenditure in 2013 was R12.7bn below the 2012 forecast. This decrease in anticipated expenditure underlines the challenges experienced by the industry.
Growth in the order book for 2014 was 16% in line with the percentage experienced in 2012 after a flat 2013. The secured order book now covers 1.3 times current-year revenue, a marginal increase on 1.2 in the prior year, but still well below the 1.5 of 2012.
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Total revenue increased by 9% to R172bn in the prior year mainly as a result of an increase of R4.1bn from Group Five, R1.5bn from Murray & Roberts and R1.3bn from Avenue. These increases were large as a result of increased revenue from energy, oil and gas projects and a weaker rand partially offset by weaker demand from the mining sector.
Total operating costs increased by 9.4%, marginally higher than the revenue growth, resulting in a slightly lower profit margin. The report shows that for the heavy construction companies, staff costs continued to represent a significant component of operating costs, constituting 28.3% of total operating costs (2013: 27.8%) and increased by 10% on the prior year.
The common key risks identified by construction companies include risks to growth and expansion of the industry; industrial unrest; loss of key skills and expertise; health, safety and environmental sustainability; project execution; transformation; tender risks; credit risk management; and compliance with the laws and regulations.
In addition to these risks, the construction industry remains under pressure from the public and regulators to significantly improve its safety performance, with challenges prevailing across the industry. There is also the added risk of non-compliance with the Construction Charter, and concerns around the retention of talent and skills shortages.
Top Construction Companies In South Africa
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