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Group Five announces Interim Results to December 2014

11 February 2015

  • Disappointing operating performance, with a particularly weak operational performance in Civil Engineering, as well as retrenchment costs in Civil Engineering and contract finalisation costs impacting Energy’s results
  • Balance of Engineering & Construction* performed in line with expectations
  • Against the more volatile Engineering & Construction earnings, the group’s annuity-income businesses in Investments and Concessions and Manufacturing continue to underpin group performance
    • Manufacturing: solid performance despite flat to declining markets
    • Investments and Concessions: improved earnings on the back of solid Intertoll Europe results

* Refers to the clusters previously called “Construction” and “Engineering & Construction” which have, as previously announced, been restructured into one cluster namely “Engineering & Construction”.

Commenting on the results, Group Five CEO Eric Vemer who became the group’s new CEO on 1 December 2014, said:

“Although the majority of businesses performed in line with guidance given to the market in November, we are disappointed with these results. Against this, we have taken firm and immediate action by strengthening management and shedding complexity in our largest business of Engineering & Construction to ensure improved project lifecycle management and execution delivery on contracts, rightsizing our problem segment of Civil Engineering, improving group efficiencies and focusing on cutting corporate costs.

“Since taking on the CEO role in December 2014, I am pleased to have been able to review and confirm the group’s strategy with our board and executive, finalise and implement new leadership appointments, accelerate our focus on putting action behind growth initiatives aligned to our strategy, which includes direct involvement in the development of our African market and project opportunities, together with actions aimed at growing our annuity income stream businesses in Manufacturing and Investments and Concessions. We have also implemented various initiatives to further align a single culture behind our united strategy. During the period, we also continued to implement the prudent approach previously adopted in terms of both the quality of the order book secured and our philosophy towards cash preservation to fund activity which will support future profit growth. This is reflected in the current secured order book mix and reported cash position.”

Vemer also commented on the group’s award of Notice to Proceed on the R4,6 billion engineer, procure and construct (EPC)  Kpone Independent Power Project to be constructed near Tema, Ghana. The EPC contract has been awarded by Ghanaian group Cenpower Generation Company Limited (Cenpower) for the design and build of the 350 megawatt (MW) gas- and oil-fired combined cycle power plant.

“To be awarded this record African contract is a significant milestone for us and testament to our progression over the years from a pure contractor to a group that is able to deliver across the whole infrastructure lifecycle, from development to design, from construction to operation and from project management to maintenance. This contract is also the result of our proactive investment to create the Energy business, which is a direct beneficiary of our strategy to move into full turnkey delivery in growth sectors such as power.”

Group Five has successfully completed nine EPC power contracts to the value of R4 billion over the last seven years, with 40% of the value of the contracts executed in the rest of Africa. Kpone has the same scope, technology, equipment suppliers and projects director as the group’s successful Sasol combined cycle power plant, which was completed in 2010.

The Kpone plant is expected to take three years from award to commercial operation. A Group Five team led by experienced project directors and managers will manage the project in Ghana, a country where Group Five has successfully operated for over 15 years. Global technology leaders GE, Siemens and NEM will be supplying most of the main power generation equipment, which is typically 50% of the project value.

In terms of an update around the group’s position following the Competition Commission findings of anti-competitive behaviour in the construction sector, Mr Vemer said:

“As reported previously, the group has secured conditional leniency from the Commission in terms of the Commission’s Corporate Leniency Policy in return for full disclosure of all matters that the group was able to uncover during its internal investigation process. The group was implicated in four contracts which had not been detected through its internal investigation. Settlement has not yet been concluded on these contracts due to a lack of evidence and factual discrepancies which remain. The group is willing and remains committed to settlement on a reasonable basis should it be found to have contravened competition legislation on any of the four contracts in question. The group retains a co-operative stance with the Competition Authorities on these matters.

“We note the Competition Commission statement issued in H1 F2015 with respect to its referral of alleged collusive tendering by various firms, including Group Five, to the Competition Tribunal. This was anticipated. We have engaged in lengthy discussions with the Competition Commission and, having not reached consensus on the allegations made against the group, we informed the Competition Commission that we elected to assess our position upon review of the Competition Commission referral to the Competition Tribunal. One matter has now been referred to the Competition Tribunal and we welcome the opportunity to address and clarify this long outstanding issue to bring certainty to shareholders, employees and all other stakeholders.”

Looking forward, Mr Vemer said:

“Whilst the cost of retrenchments and restructuring will impact F2015, the benefits of this action will be seen from H1 F2016. It is pleasing to note that our order book has been replenished in line with the group strategy of positioning us for success on larger African projects in target sectors which draw on our integrated multi-disciplinary skills. The group’s total secured Engineering & Construction contracting order book stands at R13,3 billion. In addition, the group has R4,7 billion in secured operations and maintenance contracts. The overall group reported order book therefore stands at R18,0 billion, compared to the R15,2 billion reported in November last year.

“Looking forward to the next six months to the year end to June 2015, the group expects continued pressure on earnings due to ongoing slow local market order intake, restructuring costs in Civil Engineering, an ongoing higher percentage contribution from lower-margin Building and Housing and the impact of a later than expected commencement of the R4,6 billion Kpone Power Project. An improvement is expected in the group’s financial performance from F2016.”

YEAR UNDER REVIEW

FINANCIAL OVERVIEW

  • Group revenue from continuing operations decreased by 12.0% from R7,8 billion to R6,9 billion
    • This was mainly as a result of the comparatively large order book traded in the prior period in Energy and Civil Engineering
  • The group’s core operating profit decreased by 35.5% from R335,2 million to R216,0 million, with most businesses, other than the Civil Engineering segment, performing in line with the most recent margin guidance provided
  • The weaker operating results from Civil Engineering, as well as the reduced rate of trade in the Energy, Civil Engineering and Projects businesses, reduced the group’s overall core operating margin from 4.3% in the prior comparable period to 3.1%. The group’s total operating margin reduced to 3.0% (H1 F2014: 4.2%)
  • Headline earnings per share (HEPS) of 109 cents represents a decrease of 46.7%, and fully diluted HEPS (FDHEPS) of 108 cents per share a decrease of 46.2%, compared to the HEPS and FDHEPS of 204 cents and 201 cents per share respectively for H1 F2014. Fully diluted headline earnings per share from continuing operations of 107 cents per share represents a 47.0% decrease over the 202 cents per share for H1 F2014
  • Earnings per share (EPS) of 118 cents and fully diluted EPS (FDEPS) of 117 cents per share represents a 41.0% and 40.3% decrease respectively over the 200 cents per share and 196 cents per share for H1 F2014
    • The difference between earnings and headline earnings in the prior period is mainly as a result of a profit on a fair value adjustment of an investment property
  • The group’s statement of financial position continues to be sound, with a nil net gearing ratio and a bank and cash balance of R3,1 billion as at 31 December 2014 (H1 F2014: R3,2 billion; F2014: R2,9 billion)
  • A dividend for this period of 30 cents per share (H1 F2014: 45 cents) has been declared

OPERATIONAL OVERVIEW 

Engineering & Construction – 86% of group revenue, 32% of core operating profit (H1 F2014: 88%, 60%)

The cluster is a consolidation of the group’s contracting businesses.

  • Revenue decreased by 13.7% from R6,9 billion to R5,9 billion
  • Core operating profit decreased by 66.0% from R203,7 million to R69,3 million
  • Core operating profit margin was 1.2% (H1 F2014: 3.0%)
  • Over-border work contributed 24% (H1 F2014: 25%) to the cluster’s revenue

Building and Housing

The results continue to illustrate the ongoing tight trading conditions in this segment, with thin margins despite generally good execution performance against tender budgets.

  • Revenue increased by 5.1% from R2,2 billion (98% local) to R2,3 billion (99% local)
  • Core operating profit was largely unchanged over the prior comparable period, from R47,8 million to R46,1 million
  • Core operating margin decreased slightly from 2.1% to 2.0%

The secured one-year order book stands at R4,6 billion (100% local) (H1 F2014: R4,3 billion and 99% local) (F2014: R4,7 billion and 100% local). The total secured order book stands at R5,4 billion (100% local) (H1 F2014: R6,6 billion and 99% local) (F2014: R6,8 billion and 100% local).

Civil Engineering

As previously reported, operational difficulties on one contract nearing completion in H2 F2015, together with corrective action taken to rectify the contract and business performance, materially impacted the results for the first half of the financial year. Included within the operating losses of the current period is an amount of R11,7 million incurred in retrenchment costs as the group right-sizes this segment to match market demands and conditions.

  • Revenue decreased by 20.8% from R2,1 billion (54% local) to R1,6 billion (59% local)
  • Core operations generated a loss of R44,4 million for the period (H1 F2014: R31,7 million profit)

Civil Engineering’s secured one-year order book stands at R2,0 billion (56% local) (H1 F2014: R2,7 billion and 54% local) (F2014: R1,8 billion and 65% local). The full order book is at R3,1 billion (49% local) (H1 F2014: R3,4 billion and 63% local) (F2014: R2,4 billion and 75% local).

Projects

Ongoing good performance was delivered by the Projects segment, as African mining continues to support the majority of the order book, with some diversity displayed in terms of work executed in the South African mining and power sectors.

  • Revenue decreased from R1,0 billion (28% local) to R930,6 million (36% local)
  • Core operating profit decreased by 25.3% from R74,8 million to R55,9 million
  • Core operating profit margin decreased to 6.0% (H1 F2014: 7.3%)
    • A larger portion of the current order book is being executed in South Africa and in neighbouring regions, which traditionally delivers lower margins than that in the rest of Africa

The secured one-year order book stands at R2,0 billion (17% local) (H1 F2014: R1,2 billion and 48% local) (F2014: R1,7 billion and 33% local). The full secured order book stands at R2,8 billion (12% local) (H1 F2014: R1,5 billion and 52% local) (F2014: R2,1 billion and 28% local).

Energy

As previously guided, revenue was lower than the comparative period due to delayed awards both locally and in the rest of Africa. The finalisation cost at completion of certain contracts also had a short term negative impact on margins.

  • Revenue decreased by 34.0% from R1,6 billion (98% local) to R1,0 billion (88% local)
  • Core operating profit decreased by 76.2% from R49,4 million to R11,8 million
  • This resulted in a core operating profit margin of 1.1% (H1 F2014: 3.1%)

The secured one-year order book stands at R1,3 billion (22% local) (H1 F2014: R2,0 billion and 83% local) and (F2014: R1,1 billion and 77% local). The full secured order book stands at R2,0 billion (14% local) (H1 F2014: R2,5 billion and 78% local) (F2014: R1,2 billion and 74% local).

Investments and Concessions - 7% of group revenue, 48% of core operating profit (H1 F2014: 5%, 27%)
The Investments and Concessions cluster delivered an improved result on the back of a good performance from the European operations and fair value upward adjustments from the group’s investment in service concessions.

  • Revenue, which consists primarily of fees for the operation and maintenance of toll roads, increased by 6.3% from R426,7 million to R453,8 million
  • Core operating profit increased by 16.9% to R104,4 million (H1 F2014: R89,3 million)
    • The operating profit includes upward fair value adjustments of R45,7 million (H1 F2014: R28,4 million)
  • The core operating profit margin increased from 20.9% to 23.0%

Manufacturing – 7% of group revenue, 20% of core operating profit (H1 F2014: 7%, 13%)
Despite flat market volumes and the national steel strike during the first quarter, a steady performance was achieved due to management’s focus on operational efficiencies and product developments.

  • Revenue decreased by only 3.1% to R516 million (H1 F2014: R533 million)
  • The reported core operating profit for the period was R42,4 million, unchanged from H1 F2014 at R42,1 million
  • Core operating margin was 8.2% (H1 F2014: 7.9%)