Sub-Saharan Africa South Africa
Construction & Building Materials
6 February 2009
SA Construction Sector
Outlook for 2009: Storm
clouds gather
Roy Mutooni, CFA
Research Analyst
(+27) 11 775-7271
roy.mutooni@db.com
Local growth under threat from global pressure
We continue to expect the deterioration of the global macro environment to have
an enduring effect on the availability of capital for infrastructural projects
domestically, whether private sector or government funded. While most of the
planned essential government infrastructure projects may proceed due to its
willingness to provide funding from a wider budget deficit, we see rising
competition and sharper pricing putting pressure on sector margins over the
medium term.
Deutsche Securities (Pty) Ltd
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
M&R Group Ltd (MURJ.J),ZAR42.01 Buy
PPC Ltd (PPCJ.J),ZAR28.85 Buy
WBHO (WBOJ.J),ZAR93.00 Buy
Aveng (AEGJ.J),ZAR25.12 Buy
Companies featured
Aveng (AEGJ.J),ZAR25.12 Buy
2008A 2009E 2010E
DB EPS (ZAR) 5.31 5.63 6.01
P/E (x) 10.8 4.5 4.2
EV/EBITA (x) 6.4 1.2 0.6
M&R Group Ltd (MURJ.J),ZAR42.01 Buy
2008A 2009E 2010E
DB EPS (ZAR) 5.55 7.10 7.87
P/E (x) 15.9 5.9 5.3
EV/EBITA (x) 10.3 4.6 4.2
PPC Ltd (PPCJ.J),ZAR28.85 Buy
2007A 2008E 2009E
DB EPS (ZAR) 2.65 2.99 3.32
P/E (x) 16.4 9.6 8.7
EV/EBITA (x) 10.7 6.6 6.4
WBHO (WBOJ.J),ZAR93.00 Buy
2008A 2009E 2010E
DB EPS (ZAR) 12.19 14.94 16.73
P/E (x) 10.0 6.2 5.6
EV/EBITA (x) 4.3 2.5 1.6
Global Markets Research Company
Global outlook takes a turn for the worse
The global economy has recently been significantly impacted by a dramatic
tightening of money and credit markets. DB economists significantly downgraded
their expectations for medium-term global growth late in 2008, and expect to see
negative growth rates over 2009, with most regions entering deep depression,
probably the worst since the Great Depression. Emerging markets were not
spared, and growth there is expected to more than halve over this period. We
have also downgraded our South Africa (SA) growth expectations, and
accordingly, our view on fixed investment growth potential.
We expect lower pricing power, rising competition to compress margins
The key impact of these changes on the construction sector and fixed investment
growth in SA over the short to medium term is significant: we believe the
combination of declining commodity prices and tightening credit conditions may
lead to a decline in the growth of private investment. This must, in our view, result
in fewer projects being awarded, and growing competition leading to margin
compression, both in the slowing private sector projects and the growing
government sector arena.
Public spending growing, but insufficient to fully counter slowdown
Government has reiterated its intention to spur growth though infrastructure
spending by adjusting its budgetary estimates through the MTBPS announced in
November. We expect this spending to be funded through growing issuance, and
a wider budget deficit. This should, in our view, provide some activity growth in
the face of private sector slowdown. We do not, however, expect it to fully
compensate for slowing private sector spending.
We downgrade sector earnings estimates and targets
We downgrade our earnings expectations for each stock in the sector and expect
three-year CAGR EPS of 15%, 7%, 13% and 7% for MUR, Aveng, WBO and PPC,
respectively. We cut our price targets for MUR, Aveng, WBO and PPC to 6400c
(from 7500c), 3800c (from 4800c) 11600c (from 13000c) and 3700c (from 5100c),
respectively. We maintain our Buy ratings on all the stocks and our overweight
stance on the sector.
Key risks
The key risks for the sector are potential project cancellations in the short term, an
inability of the government to raise sufficient capital to fund its infrastructure
programme, and a further deterioration in the currency.
This report changes ratings, price targets, and/or estimates for several
companies under coverage. For a detailed listing of these changes, see pages
5-6.

Table of Contents
Executive Summary............................................................................3
Outlook ......................................................................................................................................3
Sector valuation ..........................................................................................................................3
Risks ..........................................................................................................................................3
Introduction and road map................................................................4
Overview of the report ...............................................................................................................4
Industry overview...............................................................................7
Storm clouds gathering: a review of 2008..................................................................................7
The new macro environment.............................................................8
Severe extended global recession most likely outcome ............................................................8
Domestic growth expectations also reduced.............................................................................8
Summary: Impact on Investment and construction sector earnings..........................................9
Outlook for GFCF in SA....................................................................10
Outlook for investment growth moderates ..............................................................................10
Government spending on infrastructure...................................................................................10
Private sector investment .........................................................................................................13
Cement industry outlook ..........................................................................................................16
Analysis of industry capacity relative to volume growth ..........................................................19
Mining industry outlook ............................................................................................................20
Sector valuation................................................................................22
Significant de-rating points to rising risk premia.......................................................................22
Company Section..............................................................................25
Murray & Roberts Group Ltd...........................................................26
Diverse earnings base, higher margins provide buffer.............................................................26
Summary: Key risks from slower mining, building and M East ................................................27
Valuation and rating ..................................................................................................................28
Key risks...................................................................................................................................29
The Aveng Group..............................................................................30
Steel volumes and a declining building sector pose greatest risk............................................30
Summary: Significant exposure to building and steel trading pose greatest risks...................31
Valuation and rating ..................................................................................................................31
Key risks...................................................................................................................................32
Wilson Bayly Holmes-Ovcon............................................................33
Greatest exposure to mining and private work ........................................................................33
Summary: Significant exposure to the private sector and mining slowdown..........................34
Earnings estimate revisions......................................................................................................34
Valuation and rating ..................................................................................................................34
Key risks...................................................................................................................................35
Pretoria Portland Cement Co...........................................................36
High margins, significant barriers to entry drive defensive edge .............................................36
Valuation and rating ..................................................................................................................38
Changes to earnings estimates and valuation..........................................................................38
Key risks...................................................................................................................................40