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Group Five announces year-end results to 30 June 2018

02 October 2018

Continued tough conditions, with ongoing negative impact from Kpone contract in Ghana

Group Five today announced its 12-month results to 30 June 2018.  As indicated to the market in the group’s trading update, its performance continued to be materially below expectations.

There were a number of reasons, which included the impact of not pursuing contracts due to rightsizing and delayed contracts or contracts not materialising following tough market conditions, as well as the cost of retrenchments in an attempt to align the cost structure to the poor market conditions. Although Construction improved its execution, with a reduction in contract losses over the previous year and profit from contracts trading ahead of plan more than compensating for contracts behind plan, extreme losses on the group’s large contract in Ghana, Kpone, continued to significantly drag down the whole group.

Solid results were delivered by Manufacturing and Investments & Concessions, with continued free cash flow in line with expectations.

Commenting on the results, CEO Themba Mosai said:

“As outlined to the market, we expected the second half to remain very difficult. However, delivering another set of extremely poor results is very disappointing for management. Although we have taken firm action in the group and on contracts, especially on our Kpone contract, the losses worsened significantly. 

“We continued to actively restructure and right size the group, cut costs and closed unsustainable businesses. We have also relocated certain businesses and our corporate office to either owned buildings or more cost-effective rentals.

“In addition to several cash-generating actions taken and securing short term bridge funding to address liquidity, post year end the board approved the partial disposal of our investment in service concessions assets in Eastern Europe, held through our joint venture investment with Aberdeen in Intertoll Capital Partners. We are also disposing of the Manufacturing cluster.”

Looking forward, Mosai added:

“As outlined before, Developments & Investments (D&I) and Operations & Maintenance (O&M) will be our core businesses going forward. Both these clusters have strong prospects, with D&I being part of a consortia that are preferred bidders on several projects in Sub-Saharan Africa and Intertoll Europe having a strong pipeline, with a few pending awards. The Intertoll Africa team has secured a well-advanced project pipeline in select African countries where we will aggressively utilise our in-house toll system and diversify beyond tolling into offerings such as highway management systems. The O&M cluster aims to build on a long term, annuity base of earnings and cash flow in select markets and defined sectors.

“It was decided to decrease our focus on EPC and Turnkey Project Solutions (TPS) activities. Unfortunately, there will be some additional retrenchments and we have started the relevant consultation processes.  

“The board is also working with its corporate finance advisors to evaluate various options to maximise shareholder value for both the Construction South Africa and Construction: Rest of Africa businesses, as well as identifying a structure to address the Group’s Voluntary Rebuild Programme (VRP) commitments.”

The total secured Construction and EPC contracting order book stands at R6,4 billion, supporting the smaller and downsized Construction and EPC clusters (June 2017: R8,7 billion and June 2016: R11,2 billion). In addition, the group has R4,8 billion in secured operations and maintenance contracts (June 2017: R5,8 billion and June 2016: R6,1 billion). The overall group reported order book at June 2018 therefore stands at R11,2 billion (June 2017: R14,6 billion and June 2016: R17,3 billion).

Resignation of CFO

The board announces the resignation of the CFO, Cristina Freitas Teixeira, with effect from 1 October 2018, with her departure from the group on 15 December 2018.
The board and management team thank her for her invaluable contribution and dedication during her 16 years at Group Five, which included eight years on the board. Cristina has been instrumental in managing the group through extremely volatile conditions over the years, with this past year being particularly challenging. She spearheaded the procurement of the bridge finance facility during the first half of the year under very trying circumstances. This facility paved the way for Group Five to continue implementing significant changes and the restructuring initiatives in the Construction cluster.   

During her notice period as CFO, she will also focus on a number of corporate initiatives in the Construction cluster, the sale of Manufacturing and the group’s partial disposal of its investment in Intertoll Capital Partners. Cristina has also offered her continued availability to the board and group on an ad hoc advisory basis after her exit. This demonstrates Cristina’s continued commitment and dedication to the group.
As announced to the market earlier this year, Group Five is currently undergoing significant restructuring and resizing, with its future focus on developments, investments and concessions. As Cristina wishes to pursue a different career, the group’s transition to a simpler and smaller business provided the ideal opportunity for to pursue her further ambitions.
Cristina has an experienced finance team that has been working with her. The board has commenced a search for a new chief financial officer for the group.

Financial overview

  • Group revenue decreased by 26.2% from R9,9 billion to R7,3 billion
    • This was mainly as a result of a 20% decrease in revenue from Construction SA and an 82% decrease in revenue from Engineer, Procure and Construct (EPC). Construction: Rest of Africa grew its revenue by 72%
    • The Investments & Concessions cluster’s revenue increased by 11% compared to F2017
    • The Manufacturing cluster, reflected as discontinued operations, grew its revenue by 19%
  • The group’s core* operating loss was R1,3 billion (F2017: loss of R659,4 million)
    • The current period’s performance was materially impacted by losses of R1,3 billion recognised on the Kpone contract reported in the EPC cluster
  • Headline earnings per share (HEPS) and fully diluted HEPS (FDHEPS) weakened from a loss of 853 cents per share in F2017 to a loss of 1381 cents in F2018
  • Earnings per share (EPS) and fully-diluted EPS (FDEPS) weakened from a loss of 829 cents per share in F2017 to a loss of 1335 cents per share in the current year
    • The difference between earnings and headline earnings this year was mainly as a result of a loss on the fair value adjustment of an investment property, profit on the sale of Group Five Pipe and profits on disposal of property, plant and equipment
  • The group’s statement of financial position reflects a net gearing ratio of zero and a bank and cash balance of R1,3 billion as at 30 June 2018 (H1 F2018: R1,7 billion and F2017: R2,3 billion)
  • The group absorbed R421,8 million (F2017: R243,1 million) cash from continuing operations before a working capital absorption of R760,9 million (F2017: R695,0 million)
    • This resulted in a net cash outflow from continuing operating activities of R1,3 billion (F2017: R1,0 billion) after settlement of taxation liabilities of R86,2 million (F2017: R133,2 million) and cash outflow from discontinued operating activities of R23,1 million (F2017: R116,9 million generated)
  • Although still cash positive, the group had limited free cash at year-end. To address the risk of short term cash pressure, several actions have been taken, which includes detailed liquidity models and cash flow forecasts, cash-enhancing actions and disposals such as Manufacturing and the group’s stake in Intertoll Capital Partners. The group experienced improved cash flow stability at year-end, with some improvement in the liquidity profile of both Construction SA and the Construction: Rest of Africa, which are the businesses where the cash pressure were previously experienced
  • The board did not declare a dividend