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Group Five announces year-end results to June 2017

22 August 2017

Group Five’s results for the year to 30 June 2017 were materially below expectations, with an operating loss compared to a profit in the prior year.

Group Five’s results for the year to 30 June 2017 were materially below expectations, with an operating loss compared to a profit in the prior year.

The main reasons for the loss were:

 

R159,1 million

 

The recognition of the group’s financial socio-economic contribution of the Voluntary Rebuild Programme (VRP) with the government of South Africa.

 

R244 million

 

The commercial close out and final settlement of the long-outstanding Transnet New Multi Product Pipeline (NMPP) contracts.

 

R40,5 million

 

Additional restructuring costs.

 

R470 million

 

A reduction in profitability from the underlying Engineering & Construction segments against guidance.

The group’s Manufacturing cluster delivered a strong result in markets that further contracted. Although the Investments & Concessions cluster continued to perform well on the back of a solid performance by the European operations, the cluster’s results were impacted by an unexpected claim at Intertoll Africa as a result of an undetected overpayment to the group over several years by a key client based on an error from the client’s consulting engineer.

The CEO Themba Mosai, who was appointed as the permanent CEO in May, said:

“We are conscious that our financial performance has been weak. As a group we have not executed fast and efficiently enough on our strategy against deteriorating market conditions. It is important that the group is structured to respond more effectively to the changing market dynamics.

“We have implemented cost-cutting initiatives for the last few years, but with the continued market decline we had to make a number of additional difficult decisions this year. We implemented the restructuring of the group started last year to create an efficient organisation in response to the market. This, unfortunately, resulted in further retrenchments.

“Since my appointment, I have concentrated on the three key issues of execution, people and processes. We have reduced the size of our group and de-layered our operations to become leaner and faster, with a strong emphasis on transparency in all our major risk areas. This allows us to move resources to where it is most needed as the markets dictate. New real-time site systems will also allow us to become aware of issues earlier in the process.”

Looking forward, Mosai said:

“It is vital to implement actions that will unlock value from our assets and improve returns to shareholders. Our restructured operations and continued improvement of the execution of our contracts will result in more focused businesses with appropriate resources and cost bases relevant to the regions and service offerings provided. The board and management will also review the most optimal structure for the group going forward to ensure we enhance shareholder value.

“We are clear on our deliverables. In the coming year, we will concentrate on turning this group around from the crises of the year to a more stable footing that will allow us to create sustained growth.”

The group’s total secured Engineering & Construction contracting order book stands at R8,7 billion (December 2016: R9,6 billion, June 2016: R11,2 billion). In addition, the group has R5,8 billion in secured operations and maintenance contracts (December 2016: R6,1 billion, June 2016: R6,1 billion). The overall group reported order book at June 2017 therefore stands at R14,5 billion (December 2016: R15,7 billion, June 2016: R17,3 billion).

The value of the group’s target opportunity pipeline stands at R151 billion, with R84 billion of this pipeline currently in tender and pre-tender stage. This is slightly lower than the R193 billion pipeline and R97 billion tender and pre-tender pipeline reported in December 2016 due to a refinement of target contracts. The pipeline indicates ongoing strong demand in power and transport, with continued activity in real estate and an improving mining and industrial sector.

YEAR UNDER REVIEW

FINANCIAL OVERVIEW

Group revenue decreased by 21.6% from R13,8 billion to R10,8 billion

 
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This was mainly as a result of a 25% decrease in revenue from the Engineering & Construction cluster

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The Manufacturing cluster grew its revenue by 17.0%

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The Investments & Concessions cluster’s revenue decreased by 8.5%

The group’s core operating profit decreased from R736,5 million profit to a loss of R659,3 million

 
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The prior year’s results reflect a high base due to stronger than usual fair value gains realised on service concessions (R730,1 million) and fair value gains on investment property (R43,5 million) in Investments & Concessions. This was offset at a group level in F2016 by a provision for a potential impaired debt in Engineering & Construction

Headline earnings per share (HEPS) and fully diluted HEPS (FDHEPS) decreased from a profit of 335 cents per share in F2016 to a loss of 853 cents in F2017

Earnings per share (EPS) and fully diluted EPS (FDEPS) decreased from a profit of 375 cents per share in F2016 to a loss of 829 cents per share in the current year

 
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The difference between earnings and headline earnings this year was mainly as a result of a profit on the fair value adjustment of an investment property held by an associate company and profits on disposal of property, plant and equipment

It is pleasing to note that the group’s statement of financial position continues to be sound, with a nil net gearing ratio and a bank and cash balance of R2,3 billion as at 30 June 2017 (F2016: R3,3 billion and H1 F2017: R2,8 billion)

The group absorbed R170,9 million (F2016: R449,4 million generated) cash from operations before a working capital absorption of R640,1 million (F2016: R30,2 million generated). This resulted in a net cash outflow from operating activities of R1,0 billion (F2016: R146,3 million) after settlement of taxation liabilities and the interim dividend paid to shareholders

The new board has made the decision to not declare a dividend at year end. This was based on their commitment to conduct a detailed review of the group’s strategy positioning and growth requirements. The board will conclude on a dividend decision by the next reporting period. The full-year dividend is therefore 14 cents based on the interim dividend paid (F2016: 72 cents)

OPERATIONAL OVERVIEW

Engineering & Construction – contributed 80.4% to group revenue (F2016: 85.0%)

Revenue decreased by 25.1% from R11,8 billion to R8,8 billion

 
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Over-border work contributed 31% (F2016: 32%) to cluster revenues

The cluster delivered an operating loss of R902,4 million, representing a core operating margin of -10.2%

 
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The R236,9 million loss in the prior year included a R365,4 million provision for a problematic debtor in Civil Engineering. Excluding the cost impact of the VRP agreement, the margin was -8.4% or a loss of R743,3 million

Although the Contracting order book decreased in the second half of the year, the decline was less than the first half. However, the ongoing order book decline resulted in negative operational gearing as costs could not be reduced quickly enough. Continued competitive market conditions translated into tighter margins on work secured, although remaining at acceptable levels compared to the group’s target returns.

The Engineering & Construction results were impacted by a number of issues:

Additional retrenchment costs of R40,5 million in the year

The VRP agreement, which impacted both the Building & Housing and Civil Engineering segments

The commercial close out and final settlement of previously-disclosed long outstanding South African public NMPP contracts, as reported to the market in the SENS announcement of 14 December 2016

 
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A decision was taken by the group to enter into a settlement agreement on these contracts instead of embarking on what was expected to be a protracted and expensive commercial and legal process to recover material costs incurred in previous periods. This settlement agreement impacted the Civil Engineering and Project segments and, most materially, the Energy segment. The conclusion of this matter has allowed the group to remove non-performing assets, improve the group’s balance sheet and ensure additional liquidity for the group, with the uncertainty of an outcome removed

Continued weak trading conditions which impacted all segments and led to a subdued order intake for the cluster during the year. This included:

 
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housing contracts which could not reach financial close

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decreased levels of awards in the civils market and the competitive landscape in the roads sector, which impacted the Civil Engineering segment

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low tendering activity in the mining and oil and gas sectors which impacted the Projects and Energy segments

Although bidding activity in the power sector remains buoyant, the length of time taken to achieve contract awards resulted in only one award in the Energy segment, during the fourth quarter of F2017. This impacted the recovery of direct and indirect overheads and the profitability for this segment through the year

Contract losses due to operational difficulties and inefficiencies on sites. This mainly affected the Projects and Civil Engineering segments

Investments & Concessions - contributed 9.6% to group revenue (F2016: 124.6%)

Revenue, which consists primarily of fees for the operation and maintenance of toll roads, decreased by 8.5% from R1,1 billion to R1,0 billion

The core operating profit margin decreased from 80.0% to 16.6% on the back of core operating profit of R173,8 million (F2016: R917,4 million)

 
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As expected, the quantum of fair value upward adjustments recorded from the group’s investment in service concessions of R98,2 million was significantly lower than the prior year (F2016: R773,6 million). As indicted in F2016, fair value adjustments for the current year was expected to return to normalised levels. This net fair value adjustment represents an upward fair value adjustment on transport concessions of R140,3 million and a downward fair adjustment of R42 million on the group’s Bulgarian development assets.

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Intertoll Africa’s operating profit was materially impacted by an unexpected claim. This stems from an undetected overpayment to the group over several years by a key client based on an error from the client’s consulting engineer. Notwithstanding the claim, the underlying business in both South Africa and Zimbabwe is performing well.

Manufacturing – contributed 10.0% to group revenue (F2016: 6.8%)

Revenue increased by 17.0% from R935,3 million to R1,1 billion

The reported core operating profit for the year was R69,3 million, which was 23.9% higher than the prior year’s core operating profit of R56,0 million

This resulted in a core operating margin of 6.3% (F2016: 6.0%)

The South African manufacturing market was subdued, with business confidence deteriorating. This impacted demand for our manufactured range of products. The ability to pass on inflating price increases was affected by competing complementary products and imports. The internal cost of production continued to rise as demand for higher wages and the rising cost of energy squeezed margins.

Against this challenging environment, the Manufacturing operations have performed exceptionally well by increasing both revenue and earnings through focusing on growing volumes aggressively and on internal efficiency.