Order book and outlook

The local building market continues to deliver a number of major projects each year, of which the Building divisions of the group are able to secure a significant share. With a strong horizon through to FY17, activity levels and margins from the divisions are likely to be sustained over the near term. Focused attention on project execution will remain a priority in the year ahead to ensure delivery to our exacting standards is maintained. Recent awards of major projects in the second half of FY15 include: commercial offices at 140 West Street in Sandton, the Ballito shopping centre in KZN, the fit out of the Netcare Hospital, and additional phases at the V&A Waterfront in the Western Cape. Additional opportunities targeted within the procurement pipeline include projects from the entertainment and public and private healthcare sectors.

In the rest of Africa, the division is the preferred contractor for two retail developments in Ghana and Mozambique, while opportunities in Namibia are also being explored.

While the outlook for the Civil engineering division, which is heavily reliant on the mining and industrial sectors, remains concerning, the division successfully secured contracts for: the construction of a parkade for Nedbank, administrative offices for Transnet at Coega in the Eastern Cape, and extensions to a mill for Petro Diamonds, which will support activity in the year ahead. Furthermore, a number of opportunities in the oil and gas, energy and mining sectors, which are expected to reach the market in FY16, have been targeted.

In recent years, the Roads and earthworks division has successfully re-directed resources into other markets as mining opportunities have dried up; however, the potential impact of the current low-growth economic environment on the ability of the public sector to fund future infrastructure projects is concerning. Having tapered off over the second half of FY15, activity in the road sector has again shown improvement, with SANRAL recently releasing a number of projects to the market. Construction of the BRT projects in KZN and Sandton and upgrades to the R24 to Rustenburg and N2 to Grahamstown will form the bulk of the local work from this sector in FY16. The pipeline market is also becoming significantly more competitive, with an increasing number of contractors bidding on available projects; however, the division was recently lowest on a tender for Umgeni Water in KZN. Construction of the ash dams and coal stock yard at the Kusile power station will continue until the end of the financial year. Two additional rural housing projects in KZN were secured in the second half of the year. With the Medupi power station beginning to come on-stream and construction at the Kusile power station advancing, it is anticipated that coal-related mining projects will begin to materialise.

In the rest of Africa, smaller-scale mining projects will continue to be targeted in order to retain a strategic presence in key markets. Various projects of this nature were secured in Botswana and Ghana toward the end of FY15, which will sustain our current activity levels. In Mozambique, further phases for the rehabilitation of the EN4 were secured during the year, while a project for the rehabilitation of a tailings facility on the Benga Coal mine in Tete was secured post year end.

Under these challenging conditions, revenue and margins from the Roads and earthworks division are expected to remain under pressure over the short term. The strategy of the divisions of maintaining a low cost base in high risk territories is essential to afford the necessary flexibility to pursue opportunities as they arise.

Non-residential building activity (commercial construction) is expected to remain subdued into 2016, reflecting persistent weakness in approvals and building commencements across most major commercial property markets. In contrast, residential building activity is forecast to remain solid into 2016 supported by elevated approvals, low mortgage interest rates, strong population growth and urban transport infrastructure developments.

The reputation of Probuild for consistent delivery and strong client relationships continues to provide opportunities to gain entry to new markets. Having successfully established a footprint in Brisbane, following the award of two projects for existing clients in FY15, the Building division of Probuild has now secured a $390 million contract in New Zealand, where building activity is again increasing. Strong Asian investment continues to support the retail and residential sectors in Melbourne and Sydney, while commercial office developments are providing opportunities as well. Building activity in Perth is expected to decline over the short term as investment in the region is largely reliant on the mining sector, which remains subdued.

The current downturn underway in engineering construction is expected to continue, as mining-related construction and related infrastructure investment falls further from its recent peaks. Increased public spending on infrastructure within Melbourne and Sydney has been identified by management as opportunities for growth. In response, the civil headquarters have now been relocated to Melbourne and, in April 2015, a recognised leader from the civil industry was appointed to reposition the business and target these markets. As previously mentioned, the capacity of the businesses in Western Australia and Queensland have been aligned to current activity levels in their respective markets.

Activity levels within the remaining continuing operations, 3Q Concrete and RMS, are expected to be sustained over the short to medium term, however margins are likely to remain under pressure. The group continues to assess the performance of its construction materials businesses and their strategic fit within the group as a whole and will favourably consider any reasonable and market-related offers in relation thereto.

Bidding on the enabling works for gas infrastructure in Mozambique is currently a key focus for the group’s Projects division, however the renewable energy sector locally and in the rest of Africa continues to provide opportunities as well.