INTEGRATED REPORT 2015

Operating context

In this section, we present a broad overview of the different regions, markets and sectors within which we operate.

INTRODUCTION

The construction industry depends on both the public and private sectors when sourcing its projects. Being large-scale in nature, these projects entail significant capital expenditure on the part of the project owners, the funding of which is largely dependent on the economic activity within their respective environments. It follows then, that activity within the construction sector is closely tied to the performance of various economies and is, hence, cyclical in nature; however, due to the long-term nature of projects, the performance of the construction sector lags behind changes in the cycles of these markets by between 18 and 24 months, with order books providing a reasonable line of sight into future activity levels.

The construction industry is also a complex, dynamic web of relationships, from clients and professionals to contractors and suppliers, and the strength of these relationships, at all levels, is key to successful projects.


GEOGRAPHIES

We operate in three distinct geographies: South Africa, the rest of Africa and Australia, servicing a broad range of building and civil engineering markets.


     SOUTH AFRICA AND THE REST OF AFRICA


The emerging market, commodity-based economies of Africa, including South Africa, are particularly exposed to changes in commodity price cycles and tend to experience higher levels of market and currency volatility.

Downward swings in commodity cycles impact not only capital expenditure from the mining sector, but also infrastructure spending by governments, due to lower tax revenues. The current low-growth environment in South Africa has certainly impacted public sector infrastructure spending to some degree. As well as having one of the largest wealth gaps between the rich and poor in the world, the South African labour market is also heavily unionised. The high levels of labour unrest experienced each year regularly affects the construction industry, and some of the sectors it services, specifically the mining sector due to the high levels of labour employed.

Infrastructure development is also a priority for governments throughout the rest of Africa, however unlocking the funding required for these projects remains a challenge for the region.


     AUSTRALIA


The Australian economy continues to demonstrate stability having delivered a 25th consecutive year of growth. Due to the high standard of living and world-class education system, Australia experiences high levels of immigration particularly from China and Asia.

Growing populations within the metropolitan cities have created demand for accommodation, retail developments, schools and universities as well as upgrades to infrastructure which support activity levels for the construction sector. Australia also has a significant resource sector, exporting large volumes of commodities to China, Asia and the United States of America. Fluctuations in global commodity prices have major impacts on the mining sector, to which the group is exposed through its Australian subsidiary WBHO Civil, now rebranded as WBHO Infrastructure.

As the third largest industry in Australia, the construction industry is a significant driver of economic activity. The Australian construction environment is heavily regulated and has a high degree of unionisation, which has a significant impact upon the industry itself. Contractors operate within loosely defined tiers which indicate the size and value of projects which may be bid upon, with “Tier one” being the highest. Probuild, an Australian subsidiary of the group, is one of the pre-eminent Tier one building contractors in Australia.

As an overview, the general construction environment in Australia remains stable notwithstanding the fluctuation in volumes of work between the various sectors. Increases in construction prices are aligned with the increase in the consumer price index experienced nationally, supported by a combination of the rationalisation of head contractors operating around the country, the strength of the residential market and the migration of workers and subcontractors from civil engineering to residential and commercial projects.




MARKETS AND SECTORS

We provide our skills and services across all three geographies through our various operating divisions: Building and civil engineering; Roads and earthworks; Australia; Projects; and Construction materials.

The group was required to navigate diverse market conditions during the course of the year. Our Building divisions were able to secure numerous large-scale projects across all geographies and maintain increasingly high levels of work-on-hand, while low commodity prices continued to impede capital expenditure from the global mining sector which impacted the performance of those divisions with exposure to this market.


     BUILDING AND CIVIL ENGINEERING


WBHO sources the large majority of its building projects from the private sector, but is to a limited extent, exposed to the public sector through public healthcare and public, private partnerships.


Building projects, which inherently contain a large proportion of subcontractor work, incorporate both construction and project management services.

The building markets experienced during the year were driven largely by strong activity from the retail and commercial office sectors of the market which together comprised 61% of building revenue achieved. Various projects from within the residential, healthcare, leisure and entertainment sectors further supported activity levels. Local activity remained centred in specific development hubs, namely Sandton, Rosebank, Menlyn and Waterfall in Gauteng, the Victoria and Alfred Waterfront in the Western Cape, Umhlanga Ridge in KwaZulu Natal (KZN) and the Coega Development Zone in the Eastern Cape. Building activity in the rest of Africa remains confined to Ghana, however two opportunities in Mozambique have been secured and we await the final award of the contracts.

In contrast most civil engineering markets, specifically the mining and industrial sectors of the market, have remained subdued. In particular, the mining sector was exceptionally quiet as persistently low commodity prices continue to impact the viability of capital projects. In recent years the energy sector has however offered numerous opportunities in the form of new coal-fired power stations, renewable energy programmes and gas related power projects which have contributed toward a significant portion of the revenue of the Civil engineering division, both locally and in the rest of Africa. The division continues to hold a strategic presence in Zambia, executing smaller-scale mining and industrial projects.


     ROADS AND EARTHWORKS


The effects of the weakened conditions within the mining sector have also impacted the Roads and earthworks division, particularly in the rest of Africa where the majority of projects are sourced from this sector.

The division’s exposure to these markets dropped from 47% to 39% as a result. The local roadwork and energy sectors have been the strongest source of projects recently, comprising 51% of the division’s overall revenue. While the pipeline market continues to offer reasonable opportunities each year, it is becoming increasingly competitive and is highly technical. The division has relatively low exposure to the rural housing market although it remains a key component of the overall project portfolio and continues to offer various opportunities.


     AUSTRALIA


Strong Asian investment continued to support activity in the residential sectors of the Australian building markets, particularly in Melbourne and Sydney.

Due to its reliance on mining activity in Western Australia the Perth building market has recently declined. In FY14, Probuild gained entry to the Queensland market securing two large-scale projects in the region. This market has continued to offer opportunities and a third project was secured in the current year. The healthcare and pharmaceutical market, to which Probuild has exposure through its subsidiary Monaco Hickey, has been extremely competitive in recent years displaying subdued activity levels as public spending in this area has been curtailed.

The end of the “mining boom” due to persistently lower commodity prices has severely impacted activity levels in the mining sector in recent years, particularly in Western Australia with very few large-scale opportunities available. Smaller-scale maintenance type projects have however provided some opportunities and WBHO Civil managed to secure some projects of this nature during the year. In Queensland, road construction activity had benefited from the flood relief programmes over the last number of years. Having ended in the previous financial year, the number of available civil engineering opportunities in the region has sharply declined.


     CONSTRUCTION MATERIALS


The construction materials businesses of the group serve the Southern African construction markets.


The reinforcing market has remained static over the last six months. Reinforcing Mesh Solution’s (RMS) share of the market is estimated to have grown to 24% mainly on the back of large urban construction projects. However, based on volumes tendered for in the current quarter, a reduction in volume is expected early next year.

3Q Concrete’s (3Q) traditional market; the mining industry in Mpumalanga, North West, Limpopo and the Northern Cape, has over the past twelve months experienced severe pressure due to the decline in commodity prices, which together with an ailing economy, has resulted in a 15% volume decline from this sector. This has been counter balanced, to some extent, by the increase in large urban construction projects secured during the period.


     PROJECTS


Activity in the public, private partnership space was quiet, however due to the ongoing energy crisis a number of opportunities in the renewable energy sector are currently being explored.