DIRECTORS’ REPORT

Nature of business

Group Five Limited is an investment holding company with interests in the building, infrastructural and engineering sectors. The company does not trade and all of its activities are undertaken through its subsidiaries, joint ventures and associates. The group operates in South Africa, rest of Africa, Middle East and Eastern Europe. The company has its primary listing on the JSE Listing requirements.

Group results

The loss attributable to equity shareholders of the Group for the year ended 30 June 2011 was R218,1 million (2010: R267,4 million profit) representing a basic loss per share of 227 cents (2010: earnings per share of 280 cents).

During the year the group processed an impairment of R521 million net of tax (2010: R293 million net of tax) to the non-current carrying value of its property, plant and equipment and goodwill assets relating to its Construction Materials segment. This forms the most material reconciling item between earnings and headline earnings. The impairment adjustment is discussed below in more detail. A full reconciliation between earnings and headline earnings is presented in note 7 of the annual financial statements.

Thus headline earnings attributable to equity shareholders of the Group for the year ended 30 June 2011 was R 318,9 million (2010: R585,9 million) representing headline earnings per share of 332 cents (2010: 614 cents). The fully diluted headline earnings per share attributable to equity shareholders of the Group for the year ended 30 June 2011 was 315 cents (2010: 561 cents).

The financial statements on pages 188 to 255 set out fully the financial position, results of operations and cash flows for the group for the financial year ended 30 June 2011. Segmental information as approved by the directors relating to the business of the group is set out on pages 192 to 194.

Subsidiaries, joint ventures and associates

The interest in subsidiaries, joint ventures and associated companies, are set out on pages 251 to 253 of this annual report. The group had previously ceased all operations in India. In terms of IFRS 5 “Noncurrent Assets Held for Sale and Discontinued Operations”, the results and financial position of these operations are accounted for as discontinued operations and reflected as “Non-current Assets Held for Sale”.

On 1 November 2008 the group acquired a 15% interest in the Waterfall Development Company (WDC) for R120 million. WDC indirectly, through its 22% investment in Atterbury Investment Holdings, holds the development rights for approximately 1,4 million square metres of a new, mainly commercial development to be built between Johannesburg and Midrand (the Waterfall Farm). During the current year the group disposed of its interest in WDC realising a fair value upward adjustment of R13,3 million and net proceeds of R133,3 million.

In the period under review, there were no business combination transactions to report.

The company’s interest in aggregate after tax profits and losses in subsidiaries is disclosed on page 251.

Accounting practice requires that the carrying value of non-current assets are reviewed for impairment when there are indicators of impairment. The weakening market conditions applicable to the Construction Materials cluster resulted in detailed impairment tests being conducted. A lack of clarity on the timing for recovery of construction materials markets, including no visible recovery in the private residential and building sector and a delay in contract roll out and awards in the public sector, required management to apply a prudent consideration to the carrying value of these assets and to process an impairment of R325,6 million in the prior year and a further R550,5 million in the current financial year. Impairment tests performed at year end indicated that no further impairment adjustments are required. The R550,5 million impairment adjustment includes a R24,9 million goodwill write off relating to the acquisition of the group’s cement extender business in the 2008 financial year.

There has been no other major change in the nature of the fixed assets of the company and its subsidiaries nor has there been any change in policy relating to the use of fixed assets. Neither the business nor part thereof has been managed by any third party during the year.

Share capital

The movements in share capital for the year under review are summarised in the statement of changes in equity on page 191 of this report. The authorised and issued share capital is as follows:

Authorised: 150 000 000 ordinary shares of no par value.

Issued: 121 477 858 ordinary shares of no par value (2010: 120 911 817).

All shares have been fully paid up.

On 1 March 2011 and 10 June 2011, 252 882 shares at a price of R34,05 and 220 468 shares at a price of R28,04 were respectively issued, in terms of the group’s BEE external ownership transactions, whereby shares are issued in lieu of dividends. In addition an amount of 92 699 shares were issued during the year in terms of the provisions of the company’s share incentive schemes.

On 29 September 2005, shareholders approved an issue of shares amounting to approximately 26.1% of the issued share capital, after such issue, in terms of a Black Economic Empowerment ownership transaction. On 10 October 2006, 376 408 shares at a total value of R11,8 million and on 18 May 2007, 116 440 shares at R54,06 per share and a total value of R6,3 million were issued in terms of the group’s BEE ownership transaction. Of these shares 25 472 605 (2010: 25 576 174) are held as treasury stock and in trust, in addition, 474 (2010: 473) were held by the share incentive trust at 30 June 2011.

The BEE ownership transaction comprised three components, namely:

	a broad-based employee scheme, comprising an original aggregate 0.6% of the enlarged share capital of the company;
	a black management share scheme comprising an original 3.9% of the enlarged share capital of the company; and
	the iLima Mvela Transaction comprising an original 21.6% of the enlarged share capital of the company.

The mechanics of the iLima Mvela Transaction are set out below:

	in terms of an Initial Subscription agreement, on 1 November 2005 each Participant subscribed for 10 478 662 Group Five shares (being Subscription Shares), at the Subscription Price of one cent per share;
	in terms of the internal funding mechanism, the Group Five shares were notionally issued at a 10% discount to the Reference Price of R16,03 per Group Five share, which equated to approximately R14,43 per Group Five share. These shares are notionally subject to a fixed funding rate over the approximate seven-year term of the scheme of 12% nominal per annum, compounded annually;
	in terms of a Forward Sale agreement, each Participant will sell to Group Five, with effect from 31 December 2013 (the end date), the number of Group Five shares held by such Participant, determined with reference to the formula set out below, at a purchase price of one cent per Group Five share.   = Notional Funding Number of Forward Terminal Amount Sale Shares Market Value per   Group Five share save that where the end date occurs as a result of an event of default in relation to such Participant (as detailed in the above agreements) the number of Forward Sale Shares shall be equal to the total number of Subscription Shares held by such Participant on the end date;
	in terms of a Further Subscription Right (contained within the agreements), each Participant shall have the right, capable of being exercised during the 30 business day period succeeding the end date, on a single occasion and provided that no event of default has occurred in relation to such Participant (as detailed in the Subscription and Sale agreements), to subscribe for up to that number of Group Five shares as is equal to the number of Group Five shares sold by such Participant to Group Five in terms of the Forward Sale. These shares will be issued at a purchase price per Group Five share, equal to the market value thereof as at the date of exercise of the Further Subscription Right by such Participant;
	in terms of the Distribution Subscription Obligation (contained within the agreements), each Participant is obliged to utilise the proceeds of all the cash distributions (and the proceeds of the distributions in specie converted to cash) received by such Participant from Group Five by virtue of such Participant’s holding of Group Five shares, during the period between 1 November 2005 and the end date, to subscribe for Group Five shares at the market value thereof as at the date of such subscription.

The group announced in June 2009 that its BEE ownership transaction with the iLima Consortium portion of the iLima Mvela Transaction would unwind and that this would entail the return of the shares held by iLima Consortium to the group. In line with this, Group Five made application to the Johannesburg High Court in September 2009 for an order compelling the return of these shares. This is a result of iLima not fulfilling certain conditions and/or breaching certain terms to which the original BEE transaction was subject. The judgment handed down by the Johannesburg High Court in April 2010, found in favour of Group Five. The result of the judgment is that the 11 015 959 Group Five shares currently held by iLima will be returned to Group Five and cancelled. The capital of the group will reduce once the shares are returned and cancelled. At 30 June 2011 the group shares held by iLima Consortium had not been returned to the group, and are subsequently held in trust as described above. The group expects the return of its shares in the F2012 financial year once legal formalities have been concluded. The unwinding of the BEE transaction with iLima Consortium is a disappointment to Group Five as the group remains committed to the advancement of broad-based black economic empowerment.

Special resolutions

No special resolutions relating to the capital structure, borrowing powers or any other material matter that affects the understanding of the Group were passed by subsidiary companies during the year under review.

Capital expenditure

Details on capital expenditure by business are set out on page 247 of this report.

Related party transactions

In prior years, it was reported that the group entered into a formal enterprise development arrangement with iLima. The iLima Group is the majority shareholder of the iLima Consortium which is one of the group’s BEE ownership transaction shareholders as discussed above. Group Five had previously made available to iLima bonds and guarantees to allow them to grow their order book and iLima leased various items required on some of their contracts from Group Five’s plant business for which rentals were charged at market related rates. In addition direct financial assistance has been provided to iLima Group (Pty) Ltd. The total capital amount outstanding on loans due by iLima Group (Pty) Ltd to the group as at 30 June 2011 amounts to R118 million (2010:R118 million). The total indirect financial assistance provided to iLima, in the form of bonds and guarantees, which remain in issue, amounts to R54 million (2010: R 54 million). The direct financial assistance, reflected as a current asset, as well as the indirect financial assistance, reflected as a contingent liability, (if incurred), will be set off against the return of the group’s shares by iLima described above.

Shareholder spread

Details of shareholder categories are set out on page 254 of this report.

Dividends

On 5 August 2011, the directors declared a final dividend of 20 cents per ordinary share (2010: 74 cents). This brings the total dividend for the year to 72 cents (2010: 137 cents). In order to comply with the requirements of STRATE the relevant details are:

No share certificates may be dematerialised or rematerialised between Monday, 26 September 2011 and Friday, 30 September 2011, both dates inclusive.

The group has previously disclosed that the company has adopted an approximate four times basic earnings per share dividend cover policy. This policy is subject to review on a semi-annual basis, prior to dividend declaration, as distributions will be influenced by business growth, acquisition activity, or movements in earnings as a result of fair value accounting adjustments. The group reports a decrease in fully diluted headline earnings per share for the year of 43.9% as a result of decreased contract trading within the Construction segment, weak performance by the Manufacturing segment in the second half of the financial year and reported losses in the Construction Materials segment. An impairment of the carrying value of non-current assets held by the Construction Materials segment of R550,5 million, discussed above, is the main difference between the reported earnings loss per share and headline earnings per share for the year. As a result the board of directors have approved a final dividend based on a cover of four times on the earnings per share before recording of impairment adjustments, pension fund deficits and non-cash fair value adjustments of R2,89. The total dividend for the year is 72 cents per share (2010: 137 cents). Refer to note 34 in the annual financial statements for additional disclosure.

Directors and secretary

The names and brief CV’s of the directors appear on page 34 of this report and further information on the directors, including their interest in the shares of the company and share-based remuneration schemes are provided on pages 254 and 72 of this report. No contracts in which the directors share an interest were entered into. The policy detailing the procedures for appointment to the board isdetailed within the operational review from the company secretary, refer to page 24 on the CD contained within this integrated report. Appointments to the board are recommended by the nominations committee and considered by the Board as a whole. This involves evaluating the existing balance of skills and experience against the needs of the group. Mr OA Mabandla and Mr DDS Robertson were appointed to the Board on 1 August 2011 and these appointments are subject to shareholder ratification. In terms of the company’s Articles of Association, P Buthelezi, LE Bakoro and JL Job retire by rotation. Being eligible, they offer themselves for re-election.

Refer to page 72 of integrated annual report for disclosure on non-executive and executive directors remuneration.

Directors’ shareholdings

At 30 June 2011, the number of ordinary shares held beneficially and non-beneficially by the current directors was 160 000 and 1 000 respectively (2010: 160 000 and 1 000 respectively). There has been no material change in their holdings between the year end and the date of this report. Refer to Annexure 6 in the annual financial statements for additional disclosure.

Borrowing powers

In terms of the Articles of Association, the company has unlimited borrowing powers.

Going concern

The directors believe that the group has adequate financial resources to continue in operation for the foreseeable future and accordingly the financial statements have been prepared on a going-concern basis. The board is not aware of any new material changes that may adversely impact the group. The board is not aware of any material non-compliance with statutory or regulatory requirements. The board is not aware of any pending changes in legislation in any of the major countries in which it operates that may affect the group.

Events after reporting date

Other than the declaration of the final dividend for the 2011 financial year on 5 August 2011 and the appointment of Mr OA Mabandla and Mr DDS Robertson as non-executive directors, subject to shareholder approval as mentioned above, the board is not aware of any matter or circumstance arising since the end of the reporting period not otherwise dealt with in the consolidated annual financial statements which significantly affects the financial position of the group as at 30 June 2011 or the results of its operations or cash flows for the year then ended.

Corporate governance

Over the past two years the group has worked closely with the Competition Commission in its investigation into the construction sector. We have been granted conditional leniency by the Commission pending the finalisation of the broader industry investigation. At this stage and on this basis the group does not deem a provision for penalties and fines to be required and has subsequently not raised a provision in these reported results.

Full details on the group’s corporate governance policies and procedures are set out in the corporate governance report on page 23 on the CD contained within this integrated report.

Share option schemes

Details of the group’s share option schemes are set out on page 71.

Bond issue under the Bond Exchange of South Africa (BESA) Domestic Medium Term Notes (DMTN) Programme

On 27 February 2007, the group, through its wholly owned subsidiary Group Five Construction (Pty) Ltd, issued two senior unsecured bonds as follows:

	GFC1: R300 million, three-year, 9.05% fixed rate per annum
	GFC2: R550 million, five-year, 9.2% fixed rate per annum

The bonds were issued under an approved R1 billion BESA listed DMTN programme. The GFC1 bullet payment was due in February 2010. In the prior year the group settled the GFC1 bullet payment of R300 million via free cash flow. The R550 million bullet payment with respect to the GFC2 bond is due in the coming year in February 2012. In relation to this programme, Global Credit Ratings agency awarded the group a long term credit rating of A and a short term credit rating of A1. The rating has been renewed during the year under review.

Auditors

The policy with regard to the non-audit services provided by the external auditors is detailed within the operational review from the company secretary, refer to page 26 on the CD contained within this integrated report. It confirms that the approval of non-audit work to be carried out by the external auditors is the responsibility of the audit committee and this is included within the committee’s terms of reference.

PricewaterhouseCoopers Inc. will continue in office in accordance with section 90(6) of the Companies Act. At the annual general meeting shareholders will be requested to appoint PricewaterhouseCoopers Inc. as the group’s auditors for the 2012 financial year and it is noted that AJ Rossouw will be the individual registered auditor who will undertake the audit.

Annual general meeting

The AGM will be held at 11:00 on 8 November 2011. Refer to pages 256 to 260 of these annual financial statements for further details of the ordinary and special business for consideration at this meeting.

Domicile, country of incorporation and registered office

The company is incorporated in the Republic of South Africa,its domicile and registered offices are 371 Rivonia Boulevard, Rivonia, 2128.