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Group Five announces full year results to June 2015

17 August 2015

The group delivered a disappointing result in F2015 due to under-performance in the Engineering & Construction cluster.

The group delivered a disappointing result in F2015 due to under-performance in the Engineering & Construction cluster.

The disappointing results were largely as a result of:

  • Further material losses incurred on a South African contract in the Eastern Cape that impacted both the Civil Engineering and Projects segments.
    • Although remedial interventions were quickly implemented, which substantially curtailed further material losses on the Civil Engineering segment scope, the full impact on costs to completion of the Projects segment scope could only be fully quantified in the second half of the financial year. Additional senior and highly experienced employees were placed on the contract to ensure contract completion in H1 F2016
  • Retrenchment and holding costs in relation to the rightsizing of the Civil Engineering segment
  • A weak performance in the Energy segment due to delayed new contract start-ups and lower revenues and finalisation costs at completion of certain contracts which impacted the first half of the year

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

“The strong performance by Investments & Concessions and the solid delivery by Manufacturing was undermined by the significant losses incurred on certain contracts in Engineering & Construction. Against this disappointing performance, we examined what needs to be fixed in our business and established clear plans to tackle the difficult issues head on, agree a common way forward and deliver on action plans. Measures taken have included increasing our team’s responsibility, accountability and consequences for poor delivery.

“Whilst a weak South African market exacerbated the poor performance, management acknowledge that a large part of the under-delivery was due to internal execution issues specifically in the Civil Engineering segment. Management acted promptly in restructuring and rightsizing this segment. The business is now more competitively placed to secure a reasonable share of available work, as well as being sized appropriately to the anticipated future market demand.”

Looking forward, Mr Vemer said:

“Despite market conditions tightening in certain areas, an improvement in the group’s financial performance is expected in the year ahead due to the enhanced group operating structure, anticipated continued solid business performance by Investments & Concessions, an improvement in the group’s reported loss-making ratio supported by completion of the material loss-making South African contract that impacted results this year as well as having substantially dealt with business restructure costs this year.

“Our continuously improving approach to large multi-disciplinary contract execution has provided us with the confidence and competitive advantage to grow our participation in these markets in future, whilst maintaining our prudent approach to risk.

“We continue to leverage off our concessions and development operating platform in both Africa and Eastern Europe to position the group to secure new projects that provide investment, construction and long term operating opportunities. This business model is proven for the group and remains a strategic priority. Due to the long-cycle nature of the projects targeted, this strategy provides the group with quality growth prospects over the medium to longer term.

“The solidly performing Manufacturing cluster, anchored by the Everite business and supported by strategic steel supply, will selectively target aligned opportunities to secure future expansion. Concurrently, a strong culture of driving operational efficiencies continues in this cluster to ensure constant alignment to the competitive pressures of international manufacturing. “

The group’s total secured Engineering & Construction contracting order book stands at R14,1 billion (December 2014: R13,3 billion, June 2014: R12,5 billion). In addition, the group has R4,7 billion in secured operations and maintenance contracts (December 2014: R4,7 billion, June 2014: R4,6 billion). The overall group reported order book at June 2015 therefore stands at R18,8 billion (December 2014: R18,0 billion, June 2014: R17,1 billion).

YEAR UNDER REVIEW

FINANCIAL OVERVIEW

  • Group revenue decreased by 9.7% from R15,4* billion to R13,9 billion
    • Mainly as a result of the comparatively large order book traded in the prior period in the Energy and Civil Engineering segments
  • The group’s core operating profit decreased by 46.4% from R650,2* million to R348,4 million
    • Due to weaker operating results from the Engineering & Construction cluster following contract losses within the Civil Engineering and Projects segments and the reduced rate of trade in the Civil Engineering and Energy segments
  • This reduced the group’s overall core operating margin from 4.2%* in the prior year to 2.5%. The group’s total reported operating margin reduced to 2.6% (F2014: 4.2%*)
    • Most segments, other than the Civil Engineering and Projects segments,
      performed in line with the most recent margin guidance provided
  • Headline earnings per share (HEPS) of 205 cents represents a decrease of 49.7%, and fully diluted HEPS (FDHEPS) of 204 cents per share a decrease of 49.0%, compared to the HEPS and FDHEPS of 407 cents and 399 cents per share respectively for F2014
  • Earnings per share (EPS) of 222 cents and fully diluted EPS (FDEPS) of 221 cents per share represents a 44.7% and 43.9% decrease respectively over the 401 cents per share and 394 cents per share for F2014
    • The difference between earnings and headline earnings in the year is mainly as a result of a profit on a fair value adjustment of an investment property held by associate company of R13,8 million (net of tax) and a net profit on disposal of an associate, including a reversal of impairment of an investment in associate of R2,6 million (net of tax)
  • The group’s statement of financial position continues to be sound, with a nil net gearing ratio and an increase in the bank and cash balance to R3,4 billion as at 30 June 2015 (F2014: R2,9 billion and H1 F2015: R3,1 billion)
  • The group generated R425,1 million (F2014: R902,7* million) cash from operations before working capital enhancements of R118,9 million (F2014: R530,7* million absorbed). This resulted in a net cash inflow from operating activities of R238,1 million (F2014: R150,6 million)
  • A final dividend of 25 cents per share (H2 F2014: 55 cents) was declared. The full year dividend for the year is thus 55 cents (F2014: 100 cents). The dividend policy therefore remains unchanged, based on the medium term business outlook and the availability of liquid resources

*Restated for the application of IFRS 5 – Non-current assets held for sale and discontinued operations, as a result of the decision to transfer the remaining business within the discontinued cluster of Construction Materials into continuing operations within the Manufacturing cluster.

OPERATIONAL OVERVIEW

Engineering & Construction – 85.3% of group revenue, 12.6% of core operating profit (F2014: 87.3%, 57.0%)

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

  • Revenue decreased by 11.7% from R13,4 billion to R11,9 billion
  • Core operating profit decreased by 88.2% from R370,9 million to R43,8 million.
  • The overall Engineering & Construction core operating profit margin was a very disappointing 0.4% (F2014: 2.8%)
  • Over-border work contributed 26% (F2014: 22%) to cluster revenues

Building and Housing

  • Revenue increased by 10.3% from R4,4 billion (98% local) to R4,9 billion (100% local)
  • Core operating profit was largely unchanged from the prior year,  increasing from R90,8 million to R91,4 million
  • This resulted in the overall core operating margin decreasing slightly from 2.0% to 1.9%

The secured one-year order book stands at R4,4 billion (100% local) (H1 F2015: R4,6 billion and 100% local) (F2014: R4,7 billion and 100% local). The total secured order book stands at R6,1 billion (100% local) (H1 F2015: R5,4 billion and 100% local) (F2014: R6,8 billion and 100% local).

 Civil Engineering

  • Revenue decreased by 29.1% from R3,8 billion (54% local) to R2,7 billion (62% local)
  • Core operations generated a loss of R96,3 million for the year (F2014: R66,6 million profit)

Civil Engineering’s secured one-year order book stands at R2,1 billion (58% local) (H1 F2015: R2,0 billion and 56% local) (F2014: R1,8 billion and 65% local). The full order book is at R3,3 billion (53% local) (H1 F2015: R3,1 billion and 49% local) (F2014: R2,4 billion and 75% local).

Projects

  • Revenue increased by 27.2% from R1,7 billion (33% local) to R2,2 billion (30% local)
  • Core operating profit decreased by 82.9% from R120,0 million to R20,4 million
  • The core operating profit margin decreased to 0.9% (F2014: 6.9%).

The secured one-year order book stands at R2,0 billion (23% local) (H1 F2015: R2,0 billion and 17% local) (F2014: R1,7 billion and 33% local). The full secured order book stands at R2,8 billion (18% local) (H1 F2015: R2,8 billion and 12% local) (F2014: R2,1 billion and 28% local).

Energy

  • Revenue decreased by 40.1% from R3,5 billion (99% local) to R2,1 billion (77% local)
  • Core operating profit decreased by 69.8% from R93,8 million to R28,3 million
  • This resulted in a core operating profit margin of 1.3% (F2014: 2.7%).

The secured one-year order book stands at R1,3 billion (21% local) (H1 F2015: R1,3 billion and 22% local) and (F2014: R1,1 billion and 77% local). The full secured order book stands at R1,9 billion (14% local) (H1 F2015: R2,0 billion and 14% local) (F2014: R1,2 billion and 74% local).

Investments and Concessions - 7.1% of group revenue, 67.9% of core operating profit (F2014: 5.9%, 30.3%)

  • Revenue, which consists primarily of fees for the operation and maintenance of toll roads, increased by 10.0% from R905,0 million to R995,1 million
  • Core operating profit was R236,6 million (F2014: R197,0 million)
    • The operating profit includes upward fair value adjustments of R115,7 million (F2014: R83,8 million).
  • Core operating profit margin increased from 21.8% to 23.8%

Manufacturing – 7.6% of group revenue and 19.5% of core operating profit (F2014: 6.9*, 12.7*)

  • Revenue remained largely unchanged from F2014 at R1,1 billion
  • The reported core operating profit for the year declined by 17.5% to R67,9 million
  • Core operating profit margin was 6.4% (F2014: 7.8%*).
    • The decline was partially due to the inclusion of the previous Construction Materials sand business into this cluster as the business was transferred from discontinued operations. The sand business incurred an operating loss of R9,4 million (F2014: R3,8 million) consisting mainly of a loss on sale of fixed assets of R6,5 million and non-recurring depreciation of R2,3 million. The operation itself generated a profit before depreciation of R584 000. The core operating margin of the traditional fibre cement and steel businesses was 7.5% (F2014: 8.3%)