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DELIVERY ON GROUP STRATEGY

This section indicates how our strategy outlined on page 2 performed against market dynamics and what our expectations are going forward.

  • CONSTRUCTION

    Strategy:
    Secure and execute large and/or multi-disciplinary contracts where the group has built capacity and can differentiate itself.

    F2011   F2012
    Market dynamics   Group’s market expectations
    Gross capital fixed investment delays in all private sector markets
    Severe slowdown in public infrastructure spend
    Reduced average size of contracts at lower margins post completion of 2010-related infrastructure spend
     
    Short term building and civil contracts will be smaller and tendered
    Medium/long term expected to favour packaged contracts
    Trends in contract size and complexity indicate that clients tend to align with contractors who will relieve them of non-core activities

    How strategy performed against market dynamics Additional actions Strategic focus
    Strategy buffered some of the worst of the market challenges
    Emphasis on securing large, longer term, multi-disciplinary contracts provided some resilience to rapid decline in contract awards
    Focus on concessions offering provided early entry opportunity in future infrastructure contracts such as roads, PPPs and power
    Despite short term hiatus in large contracts, the group has a longer term view on contract flow
    The infrastructure backlog (in all our geographies) will require us to continue building large and multi-disciplinary contract capacity
    Competence is being established in multiple business units for participation in turnkey and large contracts through cross-group packaging and the growth of engineer, procure and construct (EPC) ability in Engineering and Construction (E+C)
    Strategy supports concessions business where bankable EPC package is a pre-requisite to contract closure
    It will reduce reliance on single discipline tender market through contracts where more than one group business unit is involved


  • MANUFACTURING AND CONSTRUCTION MATERIALS

    Strategy:
    Optimise the contribution of our Manufacturing and Construction Materials portfolio to the group.

    F2011   F2012
    Market dynamics   Group’s market expectations
    Volumes and prices declined in manufacturing markets across the board
    Construction Materials experienced the worst volumes and prices in decades in line with the construction downturn
      Manufacturing
    Retail market has stabilised, but expected to remain weak for at least another 12 months
    Steel demand starting to improve slowly
    Infrastructure spend delays continue; timing of low-cost housing still uncertain

    Construction Materials
    Market volume decline slowed, but outlook set to remain tough.
    Some pricing improvement seen, which will support 12- to 18-month profitability improvement

    How strategy performed against market dynamics Additional actions Strategic focus
    Manufacturing
    Product development into new growth niches: new export markets and product range extension
    Margin decline; plant process improvements insufficient to prevent margin erosion
    Competitive advantage: developed supply chain and distribution excellence
    New international technology partnerships in Asia, Australia and South America improved product and process performance
    Manufacturing
    Refined fibre cement strategy to meet tough markets; expanded exports and grew modular housing system offering
    Investment in repositioning construction steel product range
    Steel fabrication work secured externally
    Manufacturing
    Product development to support growth pockets
    Export expansion in Fibre Cement
    Greater market penetration with new products, particularly modular housing
    Improvement in plant process design
    Restructure and reposition Steel business
    Further technology injection
    Construction Materials
    Severity of market decline superseded strategy
    Construction Materials
    Worst price and volume declines in decades led to impairment of carrying value of long term assets
    Reviewed carrying value of non-current assets in line with outlook
    Significant corrective action
    Construction Materials
    Bed down new, refocused structure
    Rebuild team
    Develop further mining crushing services opportunities within South Africa and over-border


  • INVESTMENTS AND CONCESSIONS

    Strategy:
    Build an infrastructure, concessions and property portfolio.

    F2011   F2012
    Market dynamics   Group’s market expectations
    Infrastructure Concessions
    South Africa:
    Slowdown in broader public private partnership (PPP) concessions roll out post 2010 FIFA World Cup
    Achieved preferred bidder status on two PPPs, but further delays in process
    Second phase of CTROM* transport concessions tenders
    Power concessions (independent power projects) proposed but framework uncertain
    Rest of Africa:
    Investigating PPPs
    Central and Eastern Europe:
    Weak due to economic pressures and political changes
      Concessions
    South Africa:
    Requests for proposals expected to be evaluated, with some awards
    Traction expected in SA PPP, IPP renewables market and hospital PPPs
    Rest of Africa:
    Growing appetite for PPPs (roads, water, electricity, public buildings and other services); development over one to three years
    Central and Eastern Europe:
    No improvement in market conditions for full concessions until 2013
    Some electronic tolling contracts (ETCs) expected
    More countries to adopt PPPs over next three years
    Construction Materials
    Investment in real estate developments not viable until tenant market demand recovers
      Property assets
    Conversion of land assets into developments still challenging
    Slow and protracted recovery

    How strategy performed against market dynamics Additional actions Strategic focus
    Infrastructure Concessions
    Concessions portfolio provided some defence against construction downturn
    Concessions
    Strategy unchanged:
    Investing time and resources for additional concessions markets
    Fair value profit of R33,1 million generated in current year
    Concessions
    Strategy directed towards:
    Broadening asset classes (PPPs, power, serviced accommodation, power and regional transport)
    Expanding geographic spread to reduce concentration in Eastern Europe
    Property assets
    Continued positioning for better quality, core future property development investments
    Property assets
    Developed affordable housing project with Group Five Motlekar
    Secured investment manager role for offshore listed property fund
    Fair value profit of R15,3 million generated in current year
    Property assets
    Continue property portfolio transition strategy to preserve current asset values – with a diversified portfolio of fee-generating work plus longer term equity positioning

    * Comprehensive toll road operations and maintenance.

  • EXPANSIONARY GEOGRAPHIC STRATEGY

    Strategy:
    Expand our geographic footprint to 40% of revenue outside South Africa.

    F2011   F2012
    Market dynamics   Group’s market expectations
    Global financial crisis reduced Group Five’s ability for over-border geographic expansion to 25% of revenue against the targeted 40%
     
    Africa: Steady growth in resources with infrastructure to follow over time
    Middle East: Investment in public infrastructure backed by oil price, industrialisation and economic diversification
    Eastern Europe: After two years of contract postponements/ cancellations, expect more countries to adopt PPPs over next three years

    How strategy performed against market dynamics Additional actions Strategic focus
    Geographic diversity provided some relief to deep decline in South African construction sector.
    Delayed expansion in territories where the group has built capacity, specifically Middle East and Eastern Europe
    Revenue contribution from non-South African markets was:
    2011: 25%
    2010: 20%
    2009: 37%
    2008: 34%
    Strategy unchanged.
    Resources committed to expanding group operations in current regions and entering new territories which fit the group’s capabilities and risk criteria
    Africa: Development of a more permanent presence in three distinct regions of West, East and Central Africa
    Middle East: Specific focus on Saudi Arabia, Qatar, UAE and Jordan
    Recovery of debt due to the group, order book growth
    Longer term strategy to re-build a sustainable business of relevant size
    Eastern Europe:
    Expect to participate in new pre-qualifications in new territories, with a potential beyond roads
    Secure Bulgaria IPP bankability and an additional transport concession

  • FOCUSED SECTORS: MINING, INDUSTRIAL, POWER, OIL AND GAS, WATER AND ENVIRONMENT, REAL ESTATE AND TRANSPORT

    Strategy:
    Diversify across sectors to spread risk and access growth areas.

    F2011   F2012
    Market dynamics   Group’s market expectations
    36% of Construction revenue was generated from new sectors penetrated (power and oil and gas) (vs 24% in F2010)
    Public sector work in these sectors contributed 30% of Construction revenue compared to the group’s traditional private sector role of building/civils/mining contractor
    Increased competition and margin pressure
     
    Mining: African mining recovery to continue
    Industrial: Emerging activity in pulp and paper, minerals benefaction and petrochemical
    Power: Integrated Resource Plan 2011; REFIT* bid process now in progress; growth market in baseload, independent power projects, renewable, including nuclear – group well positioned
    Oil and gas: Increased revenue in sector expected
    Water and environment: Water master plan (Department of Water and Forestry and Trans Caledon Tunnel Authority)
    – several large contracts in the market
    Real estate: Slow and protracted recovery; project funding very challenging; increased competition; affordable housing contracts increasing slowly
    Transport: Steady revenue base with growth through road concessions, port and rail possible; very competitive tender market

    * The Renewable Energy Feed in Tariff.

    How strategy performed against market dynamics Strategic focus
    Sector strategy unchanged – together with geographic expansion; it mitigated some impact of weak markets (although global economic weakness has delayed some sector development)
    Capacity built before the downturn; pre-qualified in the new sectors of power, oil and gas, PPP/EPC, as well as work secured in
    re-emerging mining sector
    Increasing contribution to order book and pipeline shows future value in these sectors
    Diversify earnings between these seven sectors
    Timing of PPP roll out is unclear
    Demand for infrastructure contracts in our targeted sectors has now become critical

    Mining
    F2010 vs F2011 contribution to:
    Construction revenue: 9% vs 11%
    Target pipeline*: 12% vs 13%
    Expand Group Five offering to the mining industry by including more group products and services
    Growth from strong operational bases established in targeted countries
    Industrial
    F2010 vs F2011 contribution to:
    Construction revenue: 4% vs 4%
    Target pipeline*: 4% vs 1%
    Use of the group’s multi-disciplinary strengths, together with technology packaging capability, to present as a strategic partner
    Power
    F2010 vs F2011 contribution to:
    Construction revenue: 7% vs 7%
    Target pipeline*: 14% vs 28%
    Continue capacity building and diversification into alternative power sources; clear demand for power in South Africa and other markets
    Use Group Five’s track record and strong position in this market
    Secure power plant contracts in thermal, renewable and nuclear technologies
    Oil and gas
    F2010 vs F2011 contribution to:
    Construction revenue: 17% vs 29%
    Target pipeline*: 3% vs 2%
    Expansion of services business and packaging of technology within E
    Strategic positioning should result in growth as global economy improves and South Africa addresses domestic infrastructure backlog
    Secure N1-N2 and new port/rail work in SA
    Expand over-border order book
    ngineering and Construction (E+C)
    Explore over-border business
    Water and environment
    F2010 vs F2011 contribution to:
    Construction revenue: 1% vs 2%
    Target pipeline*: 7% vs 8%
    Develop design/build competence in water and with technical partners
    Real estate
    F2010 vs F2011 contribution to:
    Construction revenue: 27% vs 32%
    Target pipeline*: 39% vs 32%
    Order book expansion in Building and Housing in Africa
    Development of affordable housing market in South Africa
    Design/build in support of concession PPPs
    Transport
    F2010 vs F2011 contribution to:
    Construction revenue: 35% vs 15%
    Target pipeline*: 21% vs 16%
     

    * Our Target Opportunity Pipeline is the group’s indicator of medium to long term opportunities and performance. It represents the group’s targeted contracts and includes only the value that could be traded by the group and not total contract values. In addition, it is not to be confused with the secured order book nor does the group expect to secure the full pipeline presented.

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