Building groups; listed property funds

Wednesday 19th August, 2015

THE construction market is in a bad way, so it was no surprise that the two major groups that reported this week — Group Five and Aveng — posted deteriorating results.

Aveng’s annual loss of R518m came despite R777m in profit on the sale of engineering, construction and maintenance services business Electrix, a subsidiary of McConnell Dowell. Group Five’s aftertax profit was down 36% to R280m, partly because it lost R224m on a power project in the Eastern Cape that it said was its own fault.

Group Five says SA’s power market is active, despite unpredictable lead times, and it will continue to invest in nuclear build capacity. Its multibillion-rand Kpone gas power project in Ghana has been delayed, but the project is said to be within the group’s risk-bearing capacity. The Kuvaninga power project in Mozambique is nearing completion.

Meanwhile, Aveng says restructuring has enhanced its competitive advantage in renewable power and water markets, which are expected to grow. It has also consolidated its mining business under a common management team with shared support services. But any improved operational performance has been overshadowed by the economic slowdown and by historical problem contracts continuing to affect the bottom line.

The group has seen big losses in its steel and engineering operations and says there has been no improvement in domestic infrastructure spend, worsened by reduced mining activities and labour disruptions.

INVESTORS have been hesitant to support highly specialised listed property funds due to concerns that there are not enough assets in SA to build sustainable funds. In fact, only one specialised real estate investment trust (Reit) has been listed on the JSE for a number of years: Hospitality Property Fund. The company owns some high-quality properties, including The Westin Cape Town, Radisson Blu Gautrain and The Crowne Plaza Rosebank, and initially enjoyed success thanks to tourism growth and the 2010 Soccer World Cup.

However, it has struggled to generate strong income in recent years, and investors have not received pleasing distributions.

Enter Tsogo Sun, the hospitality arm of Hosken Consolidated Investments. The company is in "hush-hush" talks with Hospitality that many market commentators say relate to a takeover. Hosken would list a Reit containing Tsogo and Hospitality’s hotel assets, which are valued at about R10bn and R5bn respectively. This would bring a mid-cap property fund to a sector desperate for scale and liquidity.

It could also encourage more fund managers to pursue dreams of listing specialised funds such as hospital and storage property Reits.

Dave Marrs edits Company Comment (