In the October issue of Construction Outlook, put out by the Australia Industry Group (AIG), the current downturn in mining-related construction is expected to continue, depressing engineering construction to a flat year ahead. Commercial construction is set to be weak also due to the decrease in projects in the near-term pipeline.
Mining construction has the worst forecast, with a projected -9.9% change over 2013-14, cancelling out the 9.9 gain over 2012-13. The following year is forecast to be much the same with a 9.0% decline.
The greatest estimated increase is to come from industrial construction, which includes projects related to oil and gas development. It is expected to be up 8.8%, and then to moderate more in 2014/15 at a growth rate of 3.2%. Oil refineries and gas processing facilities are to be up 12% while chemical plants will get hit by a -18.8% forecast.
Within transport infrastructure, the highest forecast gain is in transmission and telecommunications. The current 28.4% growth rate in 2012-13 is expected to carry on at 25.9% in 2013-14, and still be as high as 13% in 2014-15. This forecast comes from the increase in mobile data usage and the roll-out of the NBN high-speed internet network to be carried out from here on out.
Considering these figures, engineering and construction companies with exposure to the oil and gas industry will be continuing well and winning more contracts. Monadelphus Group (ASX: MND) is diversified across mining and energy resources project developments with about 19% of its revenue coming from oil and gas. It is working on the Wheatstone and Gorgon projects in WA. It raised its net profit after tax (NPAT) in 2013 from $125.9 million to $156.3 million, or 24.1%. Revenue stood at $2.6 billion.
Cardno (ASX: CDD) gets about 18% of its revenue from oil and gas projects, and has a good proportion of its infrastructure work divided amongst government and private sector. About 51% of its business is in the Americas, so regional diversification is good also. In 2013 NPAT was up only 4.7% from $74.1 million to $77.6 million on revenues of $1.19 billion.
For telecommunications infrastructure, Transfield Services (ASX: TSE) is involved in electrical transmission, and does contracting work for Telstra (ASX: TLS). It had a dip in NPAT from $77. 7 million to $66.8 million on revenue of $3.4 billion. It has recently scaled back on its investments in New Zealand by selling its stake in a joint venture with WorleyParsons that will bring in $30 million. It also affirmed its profit guidance of $65 million to $70 million.
Leighton Holdings (ASX: LEI) is also a major contractor for telecommunications infrastructure work. NPAT was up 28% from $344.9 million to $442.1 million, and it is forecast to grow earnings per share by 34.5% over the next two years.
Foolish takeaway
The overall construction outlook is not seen to go heavily down, but taper down to flat growth over the next two years, aligned with the mining industry's trajectory. Investors need to watch for signs of a bottoming out of mining, and be assessing the strong construction players that can cut back enough to stabilise business until the next upturn arrives.
