Billions in new work for M&R, Aveng

Order books stable, pipelines of R80bn-R100bn but signs of strain as well. A number of analysts have been worried about the end of huge 2010 contracts in the next few months - but Murray & Roberts (JSE:MUR) and Aveng (JSE:AEG) remain basically bullish.
Some of the big projects coming to fruition soon include:

    * The World Cup stadia
    * Freeway upgrades in the major cities
    * King Shaka Airport
    * Other airport upgrades
    * A large part of the Gautrain

M&R CEO Brian Bruce put out a statement on prospects at the AGM on Wednesday. It contained cautious elements - but also news of billions of rands of new work.

Aveng on Friday reported an order book and a project pipeline that runs well past 2010, indicating that the Big Two are at an advantage as some highly visible contracts come to an end.

Eskom and Transnet remain by far the two biggest spenders. SA National Roads Agency has outstanding projects worth billions. Bruce says the Department of Water Affairs needs dams and pipelines. Dozens of municipalities also need to spend to improve service delivery.

Bruce said there was very little work from the private sector inside SA. In other jurisdictions, a number of mining projects either continue or are about to resume in response to improving commodity prices. Clough in Australia has picked up gas and oil work. Other projects have been secured in the Middle East. Some 40% of M&R's orders are offshore.

Bruce reported that the signed order book was nearly static at R40bn. He added that revenue replacement has come from a "quality Project Opportunity Pipeline that amounts to R80bn".

This is defined as "the sum of those project opportunities that have passed through an initial filter system and against which tender investment has or will be committed".

Bruce said pricing on projects has become more competitive but everything that M&R has tendered for in the project opportunity pipeline is at an acceptable margin.

"We are not too concerned about margins because they depend on how you structure costs "

Bruce said construction is a lag industry. If there is a green-shoots upturn in 2010, M&R will feel it only from 2011.

I asked Bruce whether SA might run out of money, given the pace of construction for the next few years. He dismissed the thought.

Not all is rosy in the construction garden. Both M&R and Aveng warned that the stronger rand would reduce foreign earnings.  There was also evidence of strains typical in a building boom. M&R mentioned resolution of claims and variations on the Gautrain project.

M&R's working capital needs have soared. This was the result of "inadequate project definition resulting in scope variations and cost consequences". It mentioned formal third party resolution processes such as arbitration and litigation.

Bruce's statement said M&R has proactively tried to identify collusive conduct in certain of its operations and reported it to the Competition Commission, hoping for leniency. Another negative was the suspension of the Kolwezi Project in the DRC. Access to Medupi power station has been delayed. Union Carriage works has reduced its refurbishments.

Aveng on Friday warned about tough conditions in 2010 but then disclosed that its order book was steady at R31bn.

It picked up a R350m contract to build a hospital in the Western Cape, R320m for power station chimneys and silos and a R360m platinum contract at Two Rivers. Its project pipeline is R100bn.

FNB's survey of builders and building products suppliers this week reported an appreciable uptick in confidence in building, as opposed to construction. This was met with disbelief by many, as few can see improvement in residential, commercial or industrial.

A number of construction shares moved up this week, among them Protech Khuthele (JSE:PKH), Afrimat, PPC and York Timbers (JSE:YRK), showing that there could still be legs in the building boom yet.

Get commercial property news by email

Free alerts when we publish — pick a focus or get everything, unsubscribe in one click. Subscribe »