The dire straits in which Z. Landau Constructing and Engineering finds itself, which last week led the company to file a petition for a stay of proceedings against it, shortly after Gazit-Globe Ltd. (NYSE: GZT; TASE: GZT; TSX: GZT) was forced to inject millions of shekels into U. Dori Construction Ltd. (TASE: DRCN) in order to prevent its collapse, indicate the difficult state of Israeli constructionrformance contractors.
The second quarter financial statements of one of Israel's leading contractors, Danya Cebus Ltd. (TASE: DNYA), show that the profit of even the flagship contractor and builder of residential projects is only marginal, stemming mostly from projects for its subsidiary, Africa-Israel Residences Ltd. (TASE:AFHS). It is doubtful whether this is enough to justify the activity of this division of the company.
Danya Cebus's first-half gross profit margin for projects carried out for Africa-Israel Investments Ltd. (TASE:AFIL) companies was 4-5%, while its gross profit margin on projects for external companies was -1%. To this should be added the fact that the company's revenue from projects for Africa-Israel group companies is a small fraction of its revenue from external companies, indicating low profit margins in the "objective" contracting sector, which does not include those carried out for subsidiaries.
The money Africa-Israel Residences pays for commissioning housing projects from Danya Cebus leaves and enters the same cashbox, because Danya Cebus is the Africa-Israel Residences' parent company as a result of measures implemented only a few years ago, following the upheaval experienced by Lev Leviev's group.
The 2013 figures show the same trend: projects carried out by Danya Cebus for Africa-Israel group companies generated a 5-6% gross profit margin, while projects carried out for external real estate companies generated a -1% gross profit margin.
It should also be borne in mind that Danya Cebus has other divisions, with activity in infrastructure and overseas business, which company sources say are producing profits that "compensate" for its unprofitable activity in the stagnating doemstic contracting sector (the company's first half net profit totaled NIS 18 million, less than 3% of its business volume).
At the same time, company sources are signaling what many contractors have known for a long time: "Without an infrastructure section, profitability in contracting in residential projects is next to non-existent. The contracting sector in Israel is in trouble. Companies aren't making money, and if they make a profit, it's marginal. The sector is suffering from risk and aggressive developers, who are the ones making money on projects, while the contractor is left with nothing." The source also stressed that despite the difficult situation in the contracting sector, "Danya Cebus is paying its subcontractors and suppliers exactly on schedule; it's doubtful whether a high-tech company pays its suppliers like Danya Cebus does." In response to the assertion that the company makes money only on residential projects for Africa-Israel Residences, the source added, "This is simply incorrect. We lost money on projects we did for Africa-Israel Residences in 2012, and had to spend our own money."
The company's official response indicates that it is deliberately cutting back its contracting for external companies not related to the Africa-Israel Group, indicating a low profit margin in this sector.
A Danya Cebus spokesman said, "Contracting companies often face the difficulties and risks typical of the residential real estate sector. Profit margins in residential construction are derived from the character of the projects carried out in each reporting period, not necessarily the identity of the party commissioning the job, because the price set by Danya Cebus is the same for everyone. As a result, the profit margins for companies and partnerships in the Africa-Israel group are sometimes higher and sometimes lower, as can be seen in the results for 2014.
"On the basis of past experience, Danya Cebus has decided to cut back its contracting for certain companies in the sector. On the other hand, we're expanding business with other developers, including Africa-Israel Residences, which acts responsibly and facilitates good work, while allowing a higher profit margin, even though the base price list is lower than for other companies commissioning jobs.
"In its solo reports, Danya Cebus has reported a positive cash flow totaling NIS 150 million from current activity for the past 18 months (including NIS 70 million in the first half of 2014). This cash flow reflects very good results for residential projects. Danya Cebus is one of the leading construction companies in the industry, with a good reputation for professionalism and practical experience of many years standing. It is continuing to carry out large-scale projects in Israel and overseas, and is adjusting itself to the fluctuations and uncertainty prevailing in the Israeli residential market. At the same time, the company is continuously looking additional activity segments in Israel and overseas in order to diversify its business."
Published by Globes [online], Israel business news - www.globes-online.com - on August 24, 2014
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