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Group Five faces challenging six months to December 2017

12 April 2018

Group Five today announced its interim results for the six months to 31 December 2017.  As indicated to the market in the group’s trading update, its performance for the first six months of F2018 was materially below expectations.

There were a number of reasons, which included the impact of delayed contracts or contracts not materialising due to tough market conditions and the cost of retrenchments in an attempt to align the cost structure to the poor market conditions. However, the biggest impact was from extreme losses on the group’s large contract in Ghana, Kpone.

The group’s Manufacturing cluster delivered a pleasing performance in a tough trading environment. Investments & Concessions delivered solid results on the back of a good performance by the European operations.

Commenting on the results, CEO Themba Mosai said:

“We expected this period to remain very difficult. Unfortunately, even against this expectation, our results for the six months to December were significantly below our objectives and very disappointing. The large drag on results from our Kpone contract was very unfortunate and we have taken firm action in terms of ensuring continued senior team focus to drive this contract to completion.

“We also implemented significant rationalisation and restructuring in the group and businesses and closed unsustainable businesses after assessing these against the availability and reliability of market demand and available internal core competency and skills. We reduced costs to match the reduced business sizes and implemented retrenchments. We have also relocated certain businesses to either owned buildings or more cost-effective rentals and will be moving our head office to different offices as soon as possible.

“We critically evaluated contracts and have taken a decision to only focus on disciplines with a sufficiently available market, internal competencies and a proven track record. Tendering will only be focused on contracts with more than an 80% probability of being awarded within the group’s Construction competency and skill set and confirming to a minimum gross profit margin.”

Looking forward, Mosai added:

“The group has detailed action plans underway to address and achieve its turnaround. To assist us with funding, we have signed and executed a term sheet with a funding consortium for short-term bridge funding. This will be sufficient to satisfy our cash requirements on a sustainable basis and allow the group to honour short-term outflows and realise assets in an orderly manner.  


“We are also approaching shareholders and presenting various options for their consideration in identifying the best course of action for financial support. We acknowledge that the construction sector in South Africa is currently challenging, with shareholders exposed to poor performance across the industry, which makes support for growth opportunities challenging. However, we believe that our revised strategy, which involves restructuring the group to create Developments and Investments (D&I) and Operations & Maintenance (O&M) businesses as the core business of the group, will position the firm for a more successful future.”

The group has R5,7 billion in secured Operations & Maintenance contracts (December 2016: R6,1 billion, June 2017: R5,8 billion) and R7,7 billion in secured Construction contracts (December 2016: R9,6 billion, June 2017: R8,7 billion). The overall group reported order book at December 2017 therefore stands at R13,4 billion (December 2016: R15,7 billion, June 2017: R14,5 billion).

Financial overview

  • Group revenue decreased by 14.5% from R5,8 billion to R4,9 billion, mainly as a result of a 35.4% decrease in revenue from the EPC cluster and a 12.0% decrease in revenue from the Construction cluster
    • Revenue from both Construction segments traded lower than the prior comparable period
    • The Manufacturing cluster grew its revenue by 12.0% and the Investments & Concessions cluster’s revenue increased by 7.0% compared to H1 F2017
  • The group’s core* operating loss increased from a loss of R333,6 million to December 2017 to a loss of R727,3 million
    • The performance was materially impacted by losses of R649 million recognised on the Kpone contract reported in the EPC cluster
    • Included in the core operating loss reported in the prior period is an amount of R152,7 million which is the net present value charge related to the recognition of the group’s financial socio-economic contribution of R255 million in terms of the Voluntary Rebuild Programme agreement reached with the government, as well as a R244 million charge following the commercial close out of the New Multi Product Pipeline (NMPP) contracts
    • The group’s overall core operating margin decreased from -5.7% in the prior comparable period to -14.2% and total operating margin decreased to -15.5% (H1 F2017: -5.8%).
  • Headline earnings per share (HEPS) weakened from a loss of 310 cents per share in H1 F2017 to a loss of 781 cents in H1 F2018, with fully diluted HEPS weakening from a loss of 309 cents per share in H1 F2017 to a loss of 781 cents per share
  • Earnings per share (EPS) and fully diluted EPS (FDEPS) weakened from a loss of 302 cents per share in H1 F2017 to a loss of 773 cents per share in the current period
    • The difference between earnings and headline earnings in this period 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
  • The group’s statement of financial position reflects a nil net gearing ratio
  • Although the cash on hand at the end of the period was R1,7 billion, the group has experienced a reduction in its available free cash at period end. The group has been able to contribute positively to the free cash on hand through the recovery of long-outstanding debtors, conversion of non-current assets and other cash-enhancing initiatives. These cash recoveries and initiatives are expected to provide an enhancement to the group's cash position over an 18-month period, with some initiatives already converting into free cash in Q2 F2018. As indicated earlier in this announcement, the group has also been exploring other funding options.
  • The pressure on cash was due to additional cost to completion incurred and estimated to be incurred on the Kpone power contract in Ghana, a decreasing order book in the South African Construction operations which results in the unwind of the businesses’ working capital and further rationalisation of overheads in the Construction businesses and the corporate office
  • The board has made the decision to not declare a dividend at period end

 

Revised group structure

Going forward, the group will focus on the following four business clusters:

  • Developments and Investments (D&I):
    • D&I will be the core business of the group and provides the route to market for infrastructure funders. It will concentrate on Transport, Real Estate, Power and Water.
  • Turnkey Project Solutions (TPS)
    • The Power business is being right-sized and consolidated into the TPS cluster. This cluster will only deliver medium size infrastructure contracts focusing on the Power, Real Estate, Water and Transport sectors. TPS is bidding to secure order book within the group’s stated project parameters.  Limited investment equity is required in this business, although access to financial guarantees is crucial. TPS plays a crucial role in enabling D&I participation and O&M’s access to broader markets
  • Operations & Maintenance (O&M)
    • In the Operations & Maintenance cluster solid growth is expected off the current high base, with a strong pipeline in Europe and several tenders and related work beyond tolling in South Africa. The team has also secured an advanced project pipeline in select African countries where the group intends to diversify beyond tolling. The O&M cluster aims to build on long term, sustainable, annuity revenue and cash flow in current markets and sectors, as well as leveraging this expertise into new sectors and geographies
  • Construction
    • Construction South Africa continues to be right-sized for current market conditions and for a streamlined service offering, focused on key disciplines only. The rightsizing will be completed in H2 F2018 and will allow the business to operate on a much lower cost structure and return to profitability in F2019. Following the implementation of a structure to address the Voluntary Rebuild Programme (VRP) requirements it is anticipated that the group would become a minority shareholder in the construction business.
    • Construction Rest of Africa enjoys a good, secured order book, especially in the West African mining sectors.  The lower overhead structure and recently awarded contracts will enhance business performance in H2 F2018 and a profit is anticipated in F2019

* The group provides both its total operating margin and the core operating margin from operations, as per the segmental report.

The core operating margin is the total operating margin adjusted for non-core/headline transactions such as pension fund surpluses, profit/loss on sale of, or impairment/reversal of impairment of subsidiaries and associates and the re-measurement of employment obligations.

The core operating margin reflects the underlying operating performance.

The total operating margin excludes joint arrangements equity accounted and wholly consolidated, whilst the core margin does not adjust for these joint ventures for segmental reporting purposes.

Both margins include the fair value gains in Investments & Concessions and profit/loss on sale of property, plant and equipment and investment property, as these are within the control of the group.