Group Five collapse signals SA construction demise

South Africa’s
construction industry is being demolished.

After 45 years of
trading on Johannesburg’s stock exchange, Group Five’s stock was suspended on Tuesday
after the company filed for bankruptcy protection, making it the fifth local
builder to enter business rescue in less than a year.

From a peak market
value of R8.2bn in 2007, it was worth less than R100m when the shares stopped
trading.

While the
construction industry is notoriously cyclical, the current mix of a depressed
South African economy, high levels of national debt and low infrastructure
spending is proving toxic as contracts dry up. At risk are thousands of jobs –
including 8 000 at Group Five alone – in a country with an unemployment rate of
above 27%.

“Those
construction companies that are South Africa orientated have gone from bad to
worse in the past 12 months,” Marc Ter Mors, the head of equity research
at Johannesburg-based SBG Securities, said by phone. “In South Africa,
volumes are low, pricing is under pressure and companies are taking on more
risk to win contracts, so margins are thin and that hits cash flow. There are
no real segments to hide in.”

Volatile markets

Group Five’s history
demonstrates the group’s resilience in “several extremely volatile
markets,” the company still says on its website. Even so, it has “for
some time been experiencing cash flow difficulties,” it said on Tuesday.

Murray & Roberts
saw the writing on the wall. Having built significant South African landmarks
such as Johannesburg’s Carlton Centre, the continent’s tallest building, the
company sold its building and infrastructure units in 2016 to focus on
international businesses focused on projects such as underground mining and oil
and gas.

While M&R’s
market valuation is a fraction of what it once was, the stock has gained 44% in
the past year amid takeover interest from 40% shareholder Aton GmbH.

The industry’s woes
are a far cry from the build up to the FIFA Soccer World Cup in South Africa
nine years ago, which required major national infrastructure spend, including
on new stadiums.

However, that boom
was cast in a dark light even before the tournament took place, when the
Competition Commission started investigating collusion in the industry. The
regulator settled with 15 firms in 2013, while Group Five was granted immunity
for co-operation.

Government spending

While South African
President Cyril Ramaphosa last month said government’s infrastructure spending
had slowed, he also said the state will contribute R100bn into a fund over 10
years. The plan is to use this to get financing from both private and
state-owned companies to reboot the industry.

In the meantime, the
FTSE/JSE Africa Construction & Materials Index is down 27% in the past 12
months, compared to a 6% drop in the FTSE/JSE Africa All Shares Index. There is
also risk that if South Africa’s local construction industry is wrecked, future
building projects will become more expensive, Ter Mors said.

According to Ter
Mors, as South Africa depletes its capacity to build its own infrastructure,
when the cycle turns again, it will be forced to rely on international
companies and their pricing.

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