Despite SA’s embattled construction sector gearing up to benefit from a pickup in state infrastructure spending, it could still take two years for margins to recover after years of pressure from the weak economy compounded by Covid-19 trauma, state-focused Enza Construction says.
Many contractors have not survived, “so we are actually in an interesting stage, where there a few desperate contractors taking projects at low margins”, CEO Rowan Crowie told Business Day.
The question is whether they will survive the next 18 to 24 months, taking on these projects, Crowie said, and there may be further consolidation in the industry even as tender activity picks up.
In recent years former construction Basil Read and Group Five collapsed, citing a lack of state infrastructure work after the 2010 World Cup. while many other have sought expansion offshore with mixed results.
The outlook for the sector, has improved considerably, with the state eyeing infrastructure spending as a key economic prop for recovering from the devastating effect of the pandemic. High commodity prices also point to bumper business from that industry.
The sentiment echoes that of Raubex CEO Rudolf Fourie, who said during the release of the group’s 2021 results earlier in May that though the group had a record order book, margins had not picked up as quickly. The outlook for the sector was the best in decades, Fourie said, adding the group still had an eye out for higher-margin opportunities.
Roelof Botha, economic adviser to the Optimum Investment Group, said while margins were under severe strain from the trauma of Covid-19, momentum is growing, and SA’s economic recovery has been generally better than expected.
Many operators are charging low to no margins to keep going, he said. “They have sunk costs. It is like owning an aeroplane, it is better to sell a seat for R10 than to leave it unfilled,” he said.
Low interest rates that may continue until 2023, economic recovery, and high commodity prices are reasons for optimism he said.
“There has been a 30% decline in the cost of capital since Covid-19. If that doesn’t help, I don’t know what will,” said Botha. “It’s just a question of time until people can start charging decent rates.”
As a wholly owned subsidiary of Crowie Holdings, Enza Construction was established in 2000 by brothers Rowan and Clinton Crowie. It has grown to a mid-to-large tier player, directly employing about 900 people, though it extensively uses subcontractors. Between 75% and 80% of Enza’s work involves public infrastructure projects such as schools, hospitals and social housing.
This follows a 2014 strategic shift by the group, away from construction such as shopping centres, as it sought to leverage a competitive advantage in terms of project planning, being able to provide complete solutions for projects rather than straightforward contracts.
Crowie says despite margin pressure there is much to keep it busy, and it has opened a Western Cape office, having previously been focused on Mpumalanga and KwaZulu-Natal.
The group was one of the few to keep building when SA’s lockdown was at its most severe — the Covid-19 hospital wing in the Chris Hani Baragwanath Hospital complex, with 500 beds.
According to Crowie, the group may also expand its activity in the mining sector, where it has already participated in some smaller projects. The group is now looking to grow, but organically, rather than through acquisitions, he said.
Though Enza is not planning to list in the next few years, citing among other things the loss of control and costs of raising capital, it has not ruled it out.
Source: Business Live