Global Credit Ratings (GCR) has expressed concern over the future direction of the construction industry's revenue generation. GCR's head of corporate sector, Eyal Shevel, reflected on the rating reviews conducted over the past six months and says, "Historical earnings for 2009, on which these reviews were based, do not adequately reflect the increased risks facing the industry".

While the construction industry reported strong operating results and net cash positions throughout most of 2009, this was largely due to contracts already underway or entered into in previous periods. "The evidence of the downturn in the industry was only apparent in the declining order books, which is forward looking, and suggests uncertainty of adequate opportunities to sustain revenue growth, even at moderate levels," says Shevel
Despite the concerns raised, Shevel is confident that the large local construction groups remain in a healthy financial position. "These companies have built up substantial cash balances over the past few years, with all the construction majors reporting net un-geared balance sheets. This is in contrast to international norms, where construction companies tend to be geared between 33% and 50% or even higher," he says.

Looking ahead, Shevel questions the impact of increased government funding constraints on the construction industry. "The construction industry is highly reliant on government's budgeted R850-billion infrastructure development expenditure coming to fruition. While the importance of these projects is beyond doubt, it is becoming increasingly evident that raising the money, either from already overburdened taxpayers or on the international financial markets, is far from certain".
However, risks facing the industry are not uniform across all segments. Accordingly Shevel says that, "Groups involved in the more basic sectors of the construction industry, such as roads and bulk infrastructure, are expected to ameliorate some of these risks and outperform the industry, as funding constraints are less acute."

Based on its strong position in road construction and robust results, amongst other factors, GCR reaffirmed Basil Reads long term rating at A- (single A minus). Given their exposures to the complex engineering projects and with lingering concerns regarding the Middle East, GCR placed the credit ratings for M&R and Group 5 on rating watch at the end of 2009, albeit that the ratings remain strong at A+ (single A plus) for M&R and at A (single A) Group 5.
"Ultimately," says Shevel, "it is relatively low levels of debt and strong credit protection metrics that continue to support the firm ratings accorded to the local construction companies."