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Building and Housing

  R million F2011   F2010  
  Revenue 2 143   3 186  
  Total operating profit 137   237  
  Core operating profit 137   220  
  Core operating margin (%) 6   7  
  Current assets 651   776  
  One-year order book* 2 105   2 598  
  Employees (pax) 2 003   1 794  

* F2012 (F2011) secured order book.

 
Paul le Sueur
Paul le Sueur

Building and Housing contributed 23.3% (2010: 28.1%) to group revenue and 27.4% (2010: 27.0%) to group total operating profit.

Building constructs a range of facilities, including public buildings and infrastructure, large, commercial and residential complexes, retail shopping centres and industrial premises. Housing is involved in the construction of large-scale residential and building contracts for the mining and industrial sectors, corporate and private/public sector housing developments and low-cost and affordable housing schemes.

  • Market review

    Public sector

    As widely reported, the public sector spend in South Africa has been far slower than anticipated. Significant delays in the awarding of public private partnerships (PPPs) and conventional public sector tenders have been seen.

    Against these challenges, Group Five was successful in securing contracts in the South African public sector market in different sectors. These include transportation contracts such as the Bus Rapid Transport and Integrated Rapid Transport contracts, hospitals, prisons, magistrates courts and affordable housing contracts.

    Over-border, we have seen an increased spend in the public sector in Africa on real estate contracts, such as mixed-use developments through pension fund investments. We successfully secured retail and commercial building contracts with the government pension funds in Zambia. Although we are seeing increased competition over-border, we are comfortable that the group’s experience in Africa and our established risk evaluation and management systems will enable us to compete effectively.

    Private sector

    The South African private building and housing market experienced a slowdown due to a lower uptake of tenancy in all segments of the market and far more stringent lending requirements from financial institutions. The revised ratio requirements of equity to debt in conjunction with enhanced pre-letting and sales percentages imposed on new developments have made project funding very challenging. Furthermore, there is increased competition and pressure on margins due to the excess construction industry capacity following the completion of large infrastructure contracts.

    Our South African order book currently consists of a combination of retail developments, mine housing, industrial and commercial buildings and private hospitals. Although the over-border contribution to the order book is currently still low, our move into Africa during the year from a strong South African-only focus provides a solid start to further grow our international base. The quality contracts we have secured will enable us to increasingly diversify our geographic and sector income streams.

  • Delivery

    Find below how we delivered on our objectives outlined in our F2010 integrated report.

    Key focus areas   Desired results   Status
    Integrate the KwaZulu-Natal and Western and Eastern Cape regions into one operating unit.   Enhanced economies of scale and a more competitive overhead structure.   The integration of our coastal business units into one business has enabled a more focused strategy in conjunction with enhanced economies of scale, flexibility of movement of resources between areas and a competitive overhead structure.
    Pursue and secure PPP bids already submitted.   Secure at least two of the PPP bids submitted.   In collaboration with the group’s Infrastructure Concessions segment, we were successful in our strategy in the buildings PPP market by achieving preferred bidder status on the Department of Land Reform’s head office and the rebuilding of the Munitoria local municipality offices in Tshwane.
    Expand our presence in over-border countries.   Ensure more geographic diversity, as spend has been particularly constrained in the South African market.   Strengthened and grew our position in
    Zambia and established our presence in Ghana and Nigeria.
    Pursue and secure additional contract opportunities on the Waterfall Farm development in Gauteng.   Drive tenancy and feasibility pricing to secure additional tenancy for F2011.   Weak trading conditions in the commercial and industrial sectors due to lower tenant demand have delayed contracts. However, we have successfully completed a retail outlet and a new hospital as part of the Waterfall Farm development in Gauteng. We expect the rate of construction of new commercial buildings to increase during F2012.
    Drive our own affordable breaking new ground (BNG) housing developments subsidised by government.   Break ground on two BNG opportunities in the first half of calendar 2011.   We anticipate starting construction of two BNG housing developments, the Waterfall Junction housing contract in Gauteng and the Lincoln Meade development in KwaZulu-Natal during F2012.
    Deliver affordable housing contracts.   Partner with financial institutions, mining houses, fund managers and private land owners in affordable housing delivery, including bonded and rental stock.   Involved in affordable housing contracts in Benoni, consisting of over 4 000 bonded, rental and stand sales. The first units to be completed will be included in the order book for F2012.
    Partner in the delivery of integrated BNG and rental stock developments.   Partner with provincial and local government and financial institutions.   Integrated development including bonded, rental and BNG units expected to start construction in the fourth quarter of calendar 2011. This consists of three large contracts in Vereeniging, Pretoria and Polokwane.
    Strengthen multi-disciplinary capacity and skills by ensuring the appropriate mix of skills.   Secure more multi-disciplinary contracts.   Our team was strengthened in engineer, procure and construct (EPC) and design
    ability. This has positioned us strongly in this field of real estate development in Africa.
    Ensure the most cost-effective overhead structure.   Increase our competitiveness in the current market.   Our overhead structure was reduced and streamlined in accordance with the downturn in the market. We achieved increased competitiveness without reducing levels of efficiency and service.
  • Financial overview

        Year ended
    30 June 2010
      Year ended
    30 June 2010
     
      Revenue (R’000) 2 143 004   3 186 142  
      Total operating profit (%) 6.4   7.4  
      Core operating margin (%) 6.4   6.9  

    In spite of the private building sector remaining extremely weak, Building and Housing managed to mitigate this impact through the contribution from certain public sector contracts, as well as a focus on over-border opportunities, improved execution and supply chain savings.

    Building and Housing revenue decreased from R3,2 billion (94% local) to R2,1 billion (70% local). Core operating profit declined by 38% from R220,0 million to R136,9 million, resulting in the overall core operating margin percentage decreasing from 6.9% to 6.4%. Although the margin declined, it is still at strong levels due to the completion of large contracts, as well as timeously and successfully focusing on securing new over-border and domestic contracts in public buildings and the educational and private healthcare sectors.

    The secured one-year order book stands at R2,1 billion (88% local) (2010: R2,6 billion and 78% local) and secured work at R3,1 billion (75% local) (2010: R3,5 billion
    (77% local)).

  • Material issues within the business and how these have been managed

    Increased competition

    The downturn in the Building and Housing market and excess construction capacity in the sector resulted in a dramatic increase in the level of competitiveness in the local market, with certain players accepting contracts at extremely low or negative operating margins to keep resources busy. We have instead focused our bidding strategy on securing contracts with higher barriers to entry. These include PPP opportunities and our re-entry into Africa. In the South African market, we continue to add value to our clients through innovative construction solutions focusing on cost improvement rather than reduced margins, ensuring both parties benefit.

    Manage supply chain risk

    A downturn in our sector leads to an increase in the potential for inferior delivery standards in our supply chain as suppliers need to reduce costs to remain competitive. This can lead to reduced quality and increased performance failure. The risk to the group is further exacerbated where sub-contractors are unable to secure performance bonds due to tight credit markets.

    It is therefore critical to ensure from pre-contract and inception stage that strict risk procedures are adhered to. Our established systems and processes allowed us to manage risks in this regard. Post appointment, the quality and depth of expertise within our management and supervisors continued to ensure that contracts were delivered on time and within budget.

    Manage risk in over-border countries

    In an effort to offset the downturn in South Africa and following the completion of the 2010 FIFA World Cup programme where key resources were repatriated back to South Africa, we have re-directed our business towards re-entering the rest of Africa, while retaining a strong South African base.

    Our return to over-border work provides us with increased access to contracts with enhanced returns. As over-border work often carries more risk, we have focused on adhering to the principles of our country risk procedures and ensuring the effective establishment of our structures, systems and resourcing. The strategy has been successful, with our operations in Zambia excelling from a contract execution perspective and our business development initiatives leading to three additional contracts in the country. In West Africa, our Building and Housing brand has been built in both Ghana and Nigeria. We have secured our first contract in Abuja in Nigeria and are in financial close on various appointments in both countries. It is anticipated that our African strategy will start to bear fruit in F2012.

    Optimise opportunities in South Africa’s rural areas

    Although there was a reduction in new contract opportunities in South African cities in both the private and public sectors, we have seen improved opportunities in rural areas. To capitalise on this, we have:

    Redesigned and improved our systems to ensure early information in respect of planned contracts
    Used our mobile resources which have the ability and expertise to operate and execute logistically challenging contracts in rural areas. This has allowed us to access improved opportunities in an extended local market

    EPC and design-to-deliver construction

    One of our strengths in the current market is our growing expertise in engineer, procure and construct (EPC) and design-to-deliver construction. This has positioned us well, particularly in supporting the group’s position in the private public partnerships (PPPs) market. In line with this, we were declared as preferred bidder on two PPP contracts.

    Key achievements
    Together with the Infrastructure Concessions segment, we achieved preferred bidder status on the Department of Land Reform’s head offi ce and the rebuilding of the Munitoria local municipality offi ces in Tshwane
    We strengthened and grew our African base through an expanded position in Zambia and establishing a presence in Ghana and Nigeria
    We were awarded a number of affordable housing contracts
    We improved our offering in engineer, procure and construct (EPC) and design ability, which positions us well as strong market players in Africa
  • Looking forward

    Key focus areas for F2012 Desired results
    Progress the Department of Land Reform and Munitoria PPP contracts from preferred bidder status to fi nancial close.
    Achieve financial close and commence construction
    Continue with our expanded growth into West Africa.
    Further enhance our presence in the region by commencing construction on our awarded contracts, achieving fi nancial close on opportunities within our immediate pipeline and securing further opportunities
    Pursue and secure additional contract opportunities on the Waterfall Farm development.
    Convert existing enquiries into contracts and ensure an increase in construction activity on the development
    Drive our BNG housing developments.
    Finalise the outstanding development issues on both the Waterfall Junction and Lincoln Meade Housing Developments and commence with construction prior to the end of the 2011 calendar year
    Drive our integrated housing contracts.
    Finalise the outstanding development issues to start the Cape Town and Vereeniging contracts in the fourth quarter of calendar 2011

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