Edition 6 | IM | May 30 – June 26 2012

The fruits of government’s massive infrastructure spending programme are cropping up in an unexpected place: small-cap construction companies. While the construction majors were the major beneficiaries of mega projects such as the Gautrain and World Cup stadiums, it is now the turn of smaller contractors who are picking up government spending in smaller, but more frequent, transport and low-cost housing projects.

Smaller construction players are now starting to straighten their shoulders and speak more hopefully of better margins and livelier turnover.

Andries van Heerden, CEO of construction materials business Afrimat, delivered full-year results this month with the message that state tenders are picking up. “Our experience is that there is a significant increase in tender activity, specifically for infrastructure. What is different is that contracts are becoming smaller and more geographically dispersed – in line with government’s job-creation ambitions. In particular, spending in rural markets is on the increase, including on rail maintenance, roads and low-cost housing.”

Van Heerden says anecdotal evidence, based on his quizzing of some of his peers and clients in the construction sector, confirms what Afrimat is seeing in its own books. “Some of the smaller firms are reporting a near-50% year-on-year rise in the number of tenders which they are submitting. One firm has had to beef up its tender department to cope with the increased load.”

Willie Meyburgh, CEO of Stefanutti Stocks, was less upbeat, bemoaning delayed contracts which contributed to a 20% drop in diluted headline earnings for the construction group. But Meyburgh does see smaller contract sizes as an advantage in a low-margin tender environment, as they’ll be worked out of the system by the time the construction sector turns.

Another infrastructure-related stock, cement manufacturer PPC, made no bones about its tough first half, during which earnings and margins were ravaged by competition and spiralling costs. But CEO Paul Stuiver sees some light at the end of the tunnel, referring to the fact that the cement market has grown during most of the past 12 months. “We think it’s safe to say the market has turned.”

Stuiver agrees with Van Heerden’s observation that SA’s more outlying areas are benefiting from construction spend. “There is increased demand for cement coming from rural areas, consistent with the real effort from government to help these communities by building schools, clinics and houses. In addition, we are seeing that a portion of social grants is being spent on cement, for home building.”

Stuiver sees potential. “From a cement point of view, this area has never been serviced. While it will be very challenging for a big company to service such a dispersed market, it nevertheless is an interesting opportunity.”

Afrimat’s Van Heerden has themed this period’s roadshow with his view that the construction market is ticking up, based on his positive reading of recent cement sales and the value of building plans passed. For now, the “pockets of gold” which he sees in the sector are reserved largely for the smaller players in the sector.

Edition 6 | IM | May 30 – June 26 2012

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