Dear Reader,

The South Africa’s construction sector has run headlong into a brick wall. Despite promises of lucrative government infrastructure projects to keep them busy to “the end of time”, most local firms have found their work rosters drying up. Prospective order books are still strong, but government is taking much longer than before to award tenders...

As a result construction giants like Aveng, Murray & Roberts, Group Five and Wilson Bayly Holmes Ovcon are struggling to keep their businesses running at optimum efficiencies. The ongoing decline in residential, commercial and public sector construction projects has forced them to downscale, reduce staff complements and cut overheads wherever possible. Can these construction companies carve out new opportunities to stay afloat?

I liked what I saw in a recent press release from Reuters. The article, published on Finweek.co.za, claimed Group Five (JSE: GRF) might build a R5 billion solar plant to supply regional mines with power. It’s a great business idea – construction work has dried up - so why not utilise spare capacity to invest in a construction project with a significant pay off?

Then again – I’ve been around long enough to know when to take a story with a pinch of salt. While I reckon the R5 billion solar plant construction project is the greatest idea a local construction firm has come up with in ages, I cannot see it happening… And it would take a miracle to get things off the ground in two years, as the article claims. It’ll take more than two years just to line up the necessary government planning permissions to get an independent power project off the ground!

Greg Heale, director of engineering and construction at Group Five, confirmed my suspicions when he told Reuters: “We hope to be producing power in 2013 when the project starts to come on line." In the same breath he watered down the promise with the following disclaimer: "If the project goes ahead!”

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Japan’s nuclear meltdown opens the way for sun, wind and coal

I expect Group Five’s solar power theory took root in the madness playing out in the nuclear arena of late. Governments around the world seem to have lost their marbles in the wake of the partial meltdown suffered at the Japanese Fukushima nuclear power plant. All of a sudden they’re keen to pull the plug on nuclear, opening the door for clean energy projects such as solar and wind power.

Is there decision sensible? I doubt it… Cast your mind back to the nuclear proliferation of recent years… Hundreds of nuclear plants have been built despite previous disasters at Three Mile Island (US) and Chernobyl (Russia). I reckon a couple of months after the radiation ‘settles’ on Tokyo the green light will flash above nuclear projects once more...

The analysts agree solar power isn’t cheap. South Africa reckons it could bring around 5000MW to the national grid at a cost of around $21 billion – around R20 million more than the 4800MW coal-fired Eskom plant under construction at Medupi. Of course these budgets have a way of sneaking up on one – so the first estimate is usually way off the mark.

Group Five has significantly smaller ambitions. They reckon they can generate 150MW during the initial phase and hopefully upgrade the project to 500MW at a future date. What would it take to build such a plant in South Africa? I guess the first step would be to get government permission – so a couple of visits to the Department of Public Enterprises would be in order. The second step, assuming you had a really strong balance sheet, would be to get potential clients to sign up for your ‘product’.

And the final step would be to avoid the pricing mistakes made by state electricity utility Eskom. Power generated from a private sector build would have to be sold at mutually beneficial rates… Reuters reported (bearing in mind the earlier disclaimer) that Group Five, South Africa’s fourth-largest construction firm, hoped to conclude contractual arrangements, including off-take agreements, with mining companies within the next six months.

 ‘Pie in the sky’ gets us excited about construction again

I’m not going to take any bets on whether Group Five gets this ‘solar farm’ off the ground. But I certainly like that the ‘down and out’ construction company is thinking outside the box to bolster revenues in future periods.

Although it may be a bit early to get back into the sector I would suggest, at current prices, that investors in Group Five won’t be too disappointed three years from now. I reckon its time to cautiously re-enter the sector by purchasing the company at around R26.50/share.

That’s it for this week. I will be back in seven days time with some more news and views from the exciting world of South African equity investing.

Until then, let the profits roll,

Gareth Stokes