Standard Electrical Co-owner, Stephen Pell tells us that after taking control of the business last year, he has made important changes that are now being realised. Even though the country’s construction industry is not thriving, this expert electrical contractor is in a good place and is setting its sights on Africa for further expansion.
Much like South Africa’s mining industry, the country’s construction and building industry has been wrought with problems in recent times. Even the biggest of the big have had to face up to the difficulties bought on thanks to a slow economy and falling commodity prices. Stock prices for major JSE-listed construction companies have plummeted between 42% and 72% in the past year. The best-performing among them, WBHO, has declined about 15% in that time.
The biggest among listed construction companies by turnover, Aveng, saw revenues fall 14% and net operating earnings drop 19% as headline EPS (Earnings Per Share) plunged 58% in the six months to December. It says it is feeling pressure from a decline in mining investment and the almost “non-existent” roll-out of large state infrastructure projects in SA. It has also reported labour disruptions and problems with legacy contracts.
And, unfortunately, things are not looking like brightening up anytime soon. According to Jason Muscat‚ senior industry analyst at FNB, growth in construction activity remained weak in the third quarter of 2015‚ with the slowdown likely to deepen for the rest of 2015 and into 2016 if the demand for new construction work remains poor.
“Moderating growth in capital expenditure by general government‚ the inability of public corporations to make noticeable progress on key infrastructure projects‚ labour concerns and lower commodity prices which are dampening demand for investment by the mining sector‚ and a slowdown in investment into renewable energy negatively affected construction activity in the third quarter of 2015‚” Muscat told Business Day in September.
Construction and related activities in the country account for around half a million direct jobs (2013) so what would the consequences be if the problems in the industry are to worsen? The answer is, significant.
But fortunately there is hope for companies and contractors and that hope is coming from across the border in Africa and further afield. According to Gauteng MEC for Economic Development, Environment, Agriculture and Rural Development, Lebogang Maile, growth in the continent’s construction sector no longer being “just a by-product of mining activity”, Africa will be able to further promote its industrialisation agenda, while supporting economic diversification he said in September, speaking at the opening of the 2015 BAUMA CONEXPO AFRICA in Johannesburg.
“We have every reason to believe that the construction industry is fast proving itself to be Africa’s treasure trove,” he said, citing KPMG’s Construction Survey Africa report, which stated that investments in real estate already accounted for 43.8% of capital investments and generated 33.6% of foreign direct investment jobs on the continent.
Africa also ranked high as an investment destination for construction companies, with nearly half of the 165 global leaders in construction and engineering industries surveyed in 2013 indicating the desire to venture into the continent.
Last year, the Asia-Pacific region was also a lifesaver for big South African construction firms, including Aveng and Murray & Roberts, where Chinese demand for Australian minerals has complemented a boom in oil and gas projects in the region.
SETTING THE STANDARD
So what are the benefits to South African contractors who look for work across the border? Stephen Pell, Co-owner of Standard Electrical, one of the country’s leading electrical contractors, says that expansion of this type can help to ensure growth and profitability, while also spreading the risk of exposure to local market fluctuations.
“If you’re moving into Africa with customers and funders that you know, then the risk of not getting paid has largely been taken care of and this is the biggest risk in terms of expanding into Africa.
“We’ve recently done some projects in Botswana and I think our next moves in Africa will be focussed around Zambia, Namibia, Mozambique and Ghana. There’s opportunities in all of these countries and we plan to at least be operating in some of these countries by the end of next year.
“It is a natural decision to look across the border as all markets do fluctuate and if you’re present in a number of markets then you have a better chance of managing your workflow. We have managed to improve the quantum and quality of our order book in South Africa, despite the tight trading conditions and we are now preparing the business to expand into other regions and markets. We’re certainly not deserting our home base of South Africa but we are looking to spread and grow the business off that base,” he says.
“Due to the nature of electrical contracting, compared to that of the major construction companies, we are able to be far more flexible and agile when moving to new areas. We only require a small core team for any project and are able to quickly upskill the local people to staff the rest of the project. We also do not require large fleets of plant and equipment, so crossing borders is less challenging than for the main contractors,” adds Pell.
Of course, expansion into Africa isn’t something that just happens overnight; it takes a lot of hard work and planning and requires that you build a solid and successful base in your home market first.
POWERFUL HISTORY
“Myself and my business partner, José Snyders, bought the majority of the business at the end of March 2015. Importantly, the business is now 51% BEE owned,” explains Pell.
“Standard has a long history and has been owned by many varying groups of shareholders. In 2013, on the back of declining margins in the electrical contracting space, the then owners decided to expand into energy saving retrofits of commercial properties. The business subsequently lost focus on its core business of commercial electrical contracting and struggled to maintain its dominant position. José and I got involved at a Standard Electrical board level during 2014 and started the first of a two phase, right-sizing and refocusing exercise. Having only acquired and taken operational control of the business in March 2015, we are currently engaged in ensuring further operational improvements and efficiencies, in line with our growth plans.”
Originally founded in 1946, Standard Electrical is one of the largest electrical contractors in South Africa and is recognised as having played a leading role in its sector. With 68 years of experience, the company has been involved in all facets of the electrical contracting field, specialising primarily in office buildings, shopping centres, hotels and casinos, industrial buildings, clinics, hospitals, housing, high rise apartments and general reticulation projects.
“I’m now more comfortable with how things are going, I can feel the momentum turning,” says Pell. “We have made some significant changes and although changing and turning a business takes time and effort, we are certainly starting to see some good early signs. We’ve also started to inculcate a new culture in the business, based on our company vision and values.”
THE FAVOURITE
The vision of Standard Electrical is to be the industry’s favourite contractor, while our values which guide all behaviour and decision making are: professionalism; commitment; agility; and care.
“In today’s current restricted market conditions, in our opinion, the way to best survive and thrive is to operate with discipline and professionalism and to deliver to expectations,” says Pell. “In an industry which is characterised by and perceived to produce poor quality and late delivery, we want the change in culture to ensure sustainable excellent performance, resulting in a consistent brand experience.
“We’re not there yet but we’ve started the journey and we want to ensure that all our customers, clients and partners start to witness our improved performance through their improved experience. We have a long history and vast experience and are matching that with a professional, proactive and can-do attitude.
“Quite a large portion of the senior management are hands on and experienced over a decade or two in this industry, so we’ve got skill and experience in the business. Unlike many other industries and companies, we do not face a massive skills gap, which makes our targets infinitely more achievable. Through the industry body, ECA, comprehensive training programmes are offered, which means we will be able to grow our junior staff alongside the projected growth of our company,” he adds.
Even with the SA construction industry looking the way it does right now, there are reasons to be hopeful. In 2013, the government announced it would spend R827 billion in building new and upgrading existing infrastructure. As this investment filters through, there will undoubtedly be opportunities for construction firms and contractors.
“We believe we are on the right track and are already forging strong relationships with developers, engineers and construction contractors across the industry,” says Pell.
ESKOM
When former Finance Minister Pravin Gordhan announced the investment into infrastructure, he also detailed that R205.1 billion of the R827 billion would be allocated to Eskom for new power stations, Medupi and Kusile.
Obviously, being the country’s electricity utility, the business of Eskom has an inherent link and impact on companies like Standard Electrical.
“I don’t think they’ve made life easy for the built environment market – that’s not even an argument. The market has suffered because of load shedding and lack of supply,” says Pell.
However, as much as load shedding and power outages cause havoc for many people, Pell admits that the inadequate service from Eskom has presented his business with opportunities.
“There’s an advantage for us as many developers and owners of buildings have had to put in emergency generators, energy saving retrofits and renewable energy infrastructure so there’s been opportunities but at the end of the day, you want a reliable power supply for the market to be able to grow and thrive,” he says.
Since Brian Molefe was installed as CEO as part of Public Enterprises Minister Lynne Brown’s ongoing interventions to stabilise Eskom, there have already been changes for the better.
As Medupi and Kusile gradually head towards completion and other important power projects in the renewable and traditional space continue to be announced, it seems like there will be many opportunities for Standard Electrical in the future. Also, as the country’s big construction firms continue to sweep into the African market, there is an obvious opportunity for Standard Electrical to piggy back into the “treasure trove” that is the African continent’s burgeoning construction industry and complete the company’s mission of delivering extraordinary performance in the electrical and energy contracting sectors.