This has been a period of mixed fortunes for the construction sector of the JSE. Contractors have come under severe pressure, while suppliers of building materials have prospered. On the face of it, the two should be linked.
Cement manufacturer PPC has been one of the best-performing stocks on the JSE. It jumped in value in the 12 months to April, from a low of R88,50 to over R140.
PPC is being rewarded for a turnaround strategy initiated by management about five years ago. The group modernised its manufacturing technology and introduced one of the most effective human resource approaches in SA. That left it perfectly placed for a buoyant market, and the turnaround has been phenomenal. Profit growth has consistently outstripped revenue growth.
In the year ended September last year, revenue grew by 20% to R3bn and operating profit increased by 40% to R866m. The group declared a total dividend of R13,75/share and scored a return on equity of 29,75% in September last year.
PPC's fortunes have been driven partly by improving levels of infrastructure spending, as represented by projects such as Coega, the development zone in the Eastern Cape. But a buoyant residential property market has helped.
It's much the same story for general building materials suppliers on the JSE. Italtile, Ceramic Industries, Cashbuild and Iliad have risen along with the new residential units springing up all over the country. Declining interest rates have made home owners feel confident enough to spend money on improving their homes. Ceramic tiles retailer Italtile is set to deliver its twelfth consecutive profit growth in the year to June.
But it's a different story for contractors.
Aveng CEO Carl Grim and his counterpart at Murray & Roberts (M&R), Brian Bruce, have been through a testing period. Both took office about five years ago. Bruce began a rationalisation process . Grim decided to go for acquisitions, a strategy in which Aveng challenged M&R for the spot of the largest construction group in the country. Both disposed of noncore and underperforming assets and diversified geographically, with a focus on the sub-Saharan region and the Middle East.
Then new worries emerged. The foray into the sub-Saharan region brought underperforming contracts and disputed payments. In the six months ended December, Aveng's profits suffered as a result of losses experienced in road contracts in the region. For Grim, this marked a turning point. He is scaling down Aveng's roads division.
To make things worse, profits repatriated from offshore activities came under pressure because of the stronger rand. Local clients in the manufacturing and mining sectors, too, are reeling from the currency blow and have held back infrastructure development, an important source of work for mainstream contractors.
After touching a high of R10,75 in November 2002, Aveng's share price retreated to a low of 695c in March this year. The stock is hobbling at around 730c. Revenue tumbled by 15% to R5,9bn in the six months to December last year and operating income was down by 31% to R322,4m.
Murray & Roberts experienced a 20% reduction in revenue to R4,2bn and a 28% decline in operating profit to R187m. Its share price has been around R13,20, having touched R15,40 in February .
