If measured by the performance of shares in the JSE's construction and building materials sector, the industry seems to be in a more buoyant phase than most.
Between early 2001 and December last year, the sector index virtually doubled. In this period it outperformed the all share index by 80% and it has broadly kept pace with the index since then, though that does not imply that all companies in the sector are delivering strong results.
Market valuations in this sector are heavily dominated by a few large players, notably two large construction and engineering groups, Aveng and Murray & Roberts (M&R), and cement and lime producer PPC. The index largely reflects their prices.
However, most have been benefiting from strong balance sheets, improving operational performances and higher levels of activity in some areas. The robust price gains explain some of the impressive internal rates of return (IRR) - derived from share price appreciation plus dividends - shown in the Top Performers table.
M&R has produced strong growth, with published pretax profit up 117% in the year to June, in part because it has recovered from the low base set in 2000, when it made an attributable loss of R571m. Aveng has been more consistent, but still reported growth of over 40% for the same period.
Both of these have gained in recent years from exports or from substantial business activities outside SA, which have helped to balance currency risks and exposure to modest levels of fixed investment at home.
However, international diversification has recently become a mixed blessing. The rand's stronger trend since early 2002 has resulted in hefty unrealised foreign currency translation losses recognised in December half-year accounts. And foreign revenues could shrink sharply this year.
Some of the smaller groups, too, have shown attractive profit growth. Group Five, the third-largest of the local construction groups, with annual revenue of about R4bn, lifted its published pretax profit by 31% in the six months to December. The smaller Concor (revenue of R1,3bn last year) increased its stated pretax profit by 39% in the same period. Cape-based Wilson Bayly Holmes-Ovcon's (WBHO) pretax number was up almost 27%.
One important reason for these performances lies in the partial recovery in fixed investment by both public and private sectors in areas such as construction, roads, water reticulation and mining. This has been a rising trend over the past year.
Total fixed investment grew last year at 6,5%, sharply higher than the previous year's 3,4%, though still well below the levels of the 1970s and early 1980s, when SA was spending heavily on infrastructure. Even now, economists predict it will slow to about 4%-4,5% this year and in 2004.
The private sector has remained the main driver of the fixed-investment recovery, accounting for about 74% of fixed capital formation in 2000-2001. This includes hefty expansions in the mining industry, particularly platinum, along with modernisation and expansion by the major automotive and petrochemical producers. Residential building has also shown sustained growth.
But government's contribution is rising sharply from depressed levels of a few years ago. In the first half of last year, fixed investment by government was running at around 6%. The past three national budgets have shown a shift towards capital spending, with the emphasis on expanding economic infrastructure, especially the upgrading and construction of existing and new roads.
Projections in this year's budget showed capital spending by government as a percentage of consolidated expenditure at about 8% in the 2002 and 2003 fiscal years, up from about 5% in 2000. Moreover, for the next three years, the treasury is predicting this figure will be around 9%.
A feature of the 2003 budget was the increased emphasis on government's aim to expand and upgrade general infrastructure, ranging from transport and road infrastructure to water schemes and services. In addition, accelerated depreciation allowances - 20% straight-line depreciation over five years on refurbishment costs - were introduced for urban development zones.
Despite these seemingly positive shifts in domestic spending patterns, the returns have remained patchy or depressed in some areas. When M&R published its December interims in late February, CE Brian Bruce said commercial building remained an unattractive proposition. Road building activities, he added, had "continued to disappoint, reflecting a capacity problem in the industry that seems endemic".
Materials suppliers, however, have gained from the broad improvement in domestic activity. CE Carl Grim noted in Aveng's interims that industry cement sales volumes for the six months to December were 9,9% higher than in the same period a year earlier. Cement is a significant profit contributor for Aveng, which owns 46% of Alpha Cement, with about a third of the local market.
When industry leader PPC (about 40% market share) released its half-year results to end-March, its operating profit was up 52% on a 19% revenue increase, on the back of an 8% growth in domestic cement volumes - with improved prices - and a 53% increase in cement export volumes. CE John Gomersall said domestic cement demand should continue to show year-on-year growth, compared with a "very strong" second half in 2002.
Diversified activities in areas such as engineering have also boosted overall returns for some groups in this sector. Again, these have benefited in part from the expansion of SA's exports of manufactured and mining goods.
Even with improved margins, the building and construction division now contributes only about 20%-25% of M&R's operating profit. In the latest interims, the remainder was from industry and mining (21%), fabrication and manufacture (20%), and supplies and services (40%). Expansion of these activities is itself requiring increased capital investment.
Similarly, Aveng has seen strong growth in its steel and allied activities . However, the major developments for this group in recent years have been the integration of its Grinaker and LTA construction activities and the turnaround in the Canadian arm, McConnell Dowell (see page 92).
Dorbyl has disposed of its stake in automotive components distributor Midas, its engineering division, metals trading and the water division. It is left with automotive supplies and its building products activities .
