Photo: Wayne Coetzee
  • Group Five became the latest construction company to file for bankruptcy protection this week.
  • The sector has been wrecked by weak government spending and a lethargic local economy.
  • But WBHO could benefit if the tide eventually turns.

This week, Group Five filed for bankruptcy protection – the third big South African construction firm to go bust in the past couple of months.

After a 45-year history, it was a stunning implosion for Group Five, who helped to build the King Shaka airport, the Moses Mabhida Stadium, the Durban/Johannesburg fuel pipeline, large sections of the N1, N2 and N4 highways, the head offices of Nedbank and Cell C, and many other SA landmarks.

But as with other bankrupt builders like Basil Read and Esor, it was hit hard by the sharp fall in government infrastructure projects and the weak state of the SA economy.

Conditions in the construction sector are the worst he has ever experienced in his career of more than twenty years, construction firm Concor’s acting CEO Eric Wisse told Business Insider SA.

“I believe that this is largely driven by poor economic conditions which resulted in a crippling decline in public infrastructure spending by government. Persisting poor local economic conditions resulted in declining investor confidence, and has seriously impacted private sector spending.”

This has wreaked havoc among SA's construction firms, which were some of the mightiest companies in the country slightly more than a decade ago, says Schalk Louw, portfolio manager and strategist at PSG Wealth Old Oak.

In March 2008, Aveng, Murray & Roberts and the cement producer PPC were big constituents among the top forty companies of the JSE, the FTSE/JSE Top40. 

Today, all three companies together are smaller than the smallest company in the Top 40 index at end-March 2008, which was Netcare.

The top orange line is the JSE's all share index. The red line is Group Five, the blue line is Aveng, green is Murray & Roberts and the yellow line is PPC. Source: Schalk Louw, PSG

However, boom and bust is not unusual in the South African construction industry. Strong construction periods in the early 1970s, early 1990s, and the mid-2000s were followed by downturns, with eventual recoveries.

Wisse believes a speedy implementation of government’s infrastructure programme has significant potential to re-ignite private sector investment. 

Last year, president Cyril Ramaphosa announced the creation of a massive, centralised infrastructure fund, run by experts in the presidency and using private sector managers. The fund is expected to invest R400 billion over the next three years.

WBHO could emerge a winner

If construction demand does start to turn, one local firm looks well positioned, says Louw.

“If you have patience and you aren’t short-sighted, I believe there is a good opportunity and solid value in Wilson Bayly Holmes.” 

With a market capitalisation of more than R7 billion, WBHO is the biggest remaining construction firm on the JSE. Murray & Roberts, which is currently the target of a hostile German takeover, is valued at around R6.1 billion.

WBHO – which has been part of a number of high-profile projects in recent years, including the Discovery head office in Sandton, and also has an Australian unit – has had its own share of woes.

It shocked the market last month with the news that it will suffer a large loss on a contract to build and upgrade roads in Melbourne - after it underestimated "the physical work required to be performed to meet the output specifications of the contract".

 “Yes, they have certainly made a mistake in Australia. But it looks like it may be a one-off mistake, and importantly, it looks like they have made sufficient provision for it,” says Louw.

 The rest of the business, especially in South Africa, grew better than expected. Total revenue rose by more than 11% to R20.1 billion in the six months to end-December.

Not expensive

According to Louw’s calculations, WBHO shares are currently trading at a forward price earnings ratio of less than 7 times – in other words, its share price is trading at seven times WBHO’s expected profit eighteen months in the future. Which also means it is really cheap. The average price earnings ratio for the SA market is more than double that number.

WBHO's share price. Source: Fin24

WBHO is still generating good cash flow, with stable growth and very little debt.

The current implosion in the construction sector is devastating. “But it does offer opportunities for companies like WBHO which has been managed conservatively,” Louw says.


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