Picture: THINKSTOCK
Picture: THINKSTOCK

SOUTH African construction shares have put up a mixed performance this year, highlighting optimism among some investors about recovery in the sector gaining traction.

But analysts caution it may take some time before the turnaround in the fortunes of the industry translates into earnings recovery.

"Activity in mining and general building space remains tight and competitive," said Avior Research analyst Dirk Noeth.

"Australia is a good example as mining and energy-related investment, which has shown significant growth over the past two years, is starting to slow down." He said while there were still pockets of activity in South Africa, the private sector was picking up, which was positive for the construction sector.

Aveng, the second-biggest counter on the JSE by market value, said in a business update last week it continued to experience "adverse" market conditions.

Chairman Angus Band said the group’s potential order pipeline remained stable at R111bn‚ but that tenders were taking "much longer" to be awarded and that contract terms were increasingly "onerous".

He said in South Africa the envisaged R844bn public-sector infrastructure spend had not yet translated into increased tender activity in the local market.

Coface South Africa lead analyst Saijil Singh believed the benefits of state infrastructure spending would realise in the second half of next year.

Mr Singh attributed the delay in rolling these plans out to the nature of administrating and implementing them, which included the national distribution to municipalities, the municipal tender processes, tiered production payment schemes and subcontractor reimbursements.

Despite difficult market conditions, some construction firms have fared better than others in the year to date. The construction index is up 1%, lagging the JSE all-share index, which is up about 15%.

WBHO has rallied 42%, Group Five lifted 18% and PPC rose almost 4%. But Aveng and Murray & Roberts have shed 15% and 8%, respectively, and Basil Read Holdings has given up 32%.

Mr Noeth said the main reason WBHO outperformed its peers was that investors were less concerned about potential problem contracts and margin compression, given the types of projects the company was involved in.

WBHO noted in September this year that it was experiencing an increase in the number of projects coming to market‚ especially in the private sector where long-awaited contracts had materialised. Its order book now consists of 67% foreign projects and the balance is South African.

The order book as at the end of August was R21.8bn.