The South African construction sector has indeed experienced some untouchable highs (fat years) and, more recently, business rescue lows (lean years). South African construction boomed in the 1970s when the power producers were building new power stations and the Johannesburg Central Business District (CBD) was growing on the back of consistent 7% gross domestic product (GDP) growth. It marked the South African adoption of high-rise towers after the Johannesburg city council approved additional height on qualifying buildings. This is a period that gave birth to many construction companies, one of which was Wilson-Holmes in 1970 by John Wilson and Brian Holmes. The lean years then followed as the country transitioned from apartheid to a democratic South Africa. A reduction in government spending and the suspension of building new power stations saw limited growth in the industry, and capacity reduction.
The next boom, over the period of 2003 to 2010, was driven by the mining super-cycle; World Cup stadia building projects; improving transport systems; and the construction of Medupi and Kusile power stations. Given the limited capacity, construction businesses enjoyed high margins and volumes with sizeable order books. Then the economically stunted years that characterised the Jacob Zuma administration followed and had an adverse influence on the abundance the sector previously enjoyed. Subsequently, the larger companies went on a quest for growth and opportunities beyond the borders of South Africa.
In the same vain, listed construction companies have since sold building and infrastructure businesses, like Murray & Roberts, or gone into business rescue much like Group Five and Basil Read. At the end of it all – the peaks and troughs in the sector – the net beneficiary of these exits has evidently been WBHO, who we see as the last man standing. The biggest winner in a tough operating environment that is beginning to show light of a brighter economic future.
We believe in cycles but seeing the turnaround point of a cycle during the lean years is difficult. Our in-house economic view is that the South African construction industry has been moving backwards for the last few years and that there will be more investment over the next three years. The outlook of a better future, supported by a marginal improvement in GDP, suggests that we’re moving out of the years of famine. We built our position in WBHO after the sell-off, with the view that there are noticeably few competitors in the league of WBHO who have a prudent management culture and a strong balance sheet and this encourages our view to remain invested in this company. The attractive absolute and relative valuation made WBHO a glaring buy from our perspective. We look forward to “abundant” returns for our clients. BM