Operational overview

Group

For comparative purposes, we provide both the group’s total operating margins as well as the operating margins per segmental report net of non-core/headline transactions of pension fund surpluses and deficits, fair value adjustments and profit/loss on sale or impairment of subsidiaries. We refer to the latter margin as the core operating margin, as it reflects the underlying operating performance. Both margins exclude the impairment on non-current assets adjustment.

The group’s operating margins are reflected below.

Notes:
Total operating margin % is defined as operating profit before fair value adjustments and impairment adjustments as a % of revenue.
Core operating margin % is defined as total operating margin % adjusted for the non-core transactions listed above.

Introduction

The South African private sectors in which the group’s Construction businesses operate, namely mining, industry, oil and gas, power and real estate, remained weak. Whilst some of the government-owned enterprises, namely SANRAL, Transnet and Eskom, continued to provide some workload, the timing of resumption in general government infrastructure spending has been and will remain a key factor for the domestic South African construction industry.

Although there is a planned capital investment in excess of a trillion Rand in public infrastructure spend and over R60 billion identified in the PPP and concessions market for large public buildings and roads, as well as power developments, only a few significant awards have been made in the last five consecutive halves. ‘The group has therefore adapted its strategy to focus on a more balanced portfolio of public and private domestic markets, with a resumed emphasis on expanding international order books.

In this regard, there has been an increase in group activity in the African power, energy and mining sectors in gold, copper, zinc, uranium and coal in an increasing number of carefully selected countries.

In the Middle East, the group continued to actively pursue new infrastructure and industrial opportunities in new territories outside of the weak UAE market, although new contract awards are unlikely to be secured during before H2 F2012. The resolution of the commercial closure of the two previously reported terminated contracts in Dubai is proceeding in an orderly fashion. Contract values have been agreed, with cash flow on one having been received in accordance with the agreement, whilst cash flow on the second is under negotiation.

In Eastern Europe new road transport concession projects have become less popular with certain new governments, but the increase in traffic on existing toll routes and the opening of recently-completed new routes will provide a solid and sustainable business from which further opportunities will be accessed in open road and truck tolling in Eastern Europe.

Investments and Concessions

Investments and Concessions consists of Infrastructure Concessions and Property Developments. This cluster contributed 6.0% (2010: 5.2%) to group revenue.

Infrastructure Concessions

This segment demonstrated a consistent performance despite the continued effects of the deep recession across the European region.

Revenue, which consists primarily of fees for the operation and maintenance of toll roads, decreased by 6% from R557,2 million to R522,9 million. Despite this the core operating profit margin decreased only slightly to 14.0% (2010: 15.1%), with core operating profit of R73,2 million (2010: R84,0 million). The segment also recorded fair value adjustments of R33,2 million (2010: R13,5 million) as described above.

Going forward, Eastern European and African concession opportunities are set to remain attractive, with further new projects under development in toll roads and power.
The timing of awards in the South African buildings PPP market, and renewable energy (REFIT) projects, however, remains uncertain.

Property Developments

Property Developments performed in line with our stated expectations and did not generate positive returns during this financial year. The group continues to progress its strategy of disinvestment from the residential sector in favour of securing A-grade commercial and retail property development positions in South Africa.

Therefore, as expected, Property Developments’ revenue decreased by 8% from R34,6 million in F2010 to R31,8 million. The business incurred a core operating loss for the year of R10,6 million (2010: R8,0 million). The cluster also recorded fair value adjustments of R15,7 million (2010: nil) as described above.

The Property Developments strategy is on track and the group anticipates a return to stronger results post F2012, in line with previous expectations.

Manufacturing

Manufacturing consists of the fibre cement building products business, Everite, as well as steel fabrication businesses. Manufacturing contributed 9.4% (2010: 7.6%) to group revenue.

The cluster produced disappointing results in a market where both private and public sector conditions weakened substantially.

Revenue remained unchanged at R867,5 million (2010: R866,2 million). The reported core operating profit for the year was R26,3 million which was materially lower than the prior year of R R82,3 million, resulting in a core operating margin of 3.0% (2010: 9.5%).

The Fibre Cement business achieved reasonable returns by establishing alternative income streams, whilst removing costs within the traditional business model. In the period under review, further progress was made in developing the group’s Advanced Building Technologies (ABT) product offering into the housing and building market which is set to become a significant source of off-take volumes for Everite.

Group Five Pipe benefited from increasing – although erratic – demand for bulk water transport systems, whilst the Structural Steel business unit suffered from low volumes, increasing steel prices and excessive costs and write downs within the Steel businesses.

Construction Materials

Construction Materials comprises aggregates, readymix concrete and mining crushing services. Construction Materials contributed 4.7% (2010: 4.3%) to group revenue.

This cluster experienced a particularly tough trading year, with volumes and prices depressed by the slow roll out of public infrastructure and current recessionary pressures in the residential property market. In spite of aggressive cost reduction and process improvement measures taken, this cluster had to deal with the worst downturn for decades in the aggregates and readymix market in Gauteng, its area of operation. The asphalt, mobile crushing, sand and mining crushing services operations have not been as materially affected.

The segment reported a core operating loss of R68,2 million against a core operating profit of R17,6 million in F2010. In the first half of the current financial year the cluster produced a core loss of R33,4 million. Restructuring costs were incurred predominantly in the second half.

Against continued difficult markets, the cluster was re-engineered and right-sized to survive the downturn and to create improved returns as the market recovers.

Structural, management and operational changes were implemented and a detailed market validation and asset verification and valuation exercise undertaken. Process costs were reduced and efficiencies gained to limit the margin impact from depressed volumes and prices. A gradual recovery is expected over the next 12 to 18 months.

Construction

Construction comprises the business segments of Building and Housing, Civil Engineering and Engineering. Engineering incorporates the businesses of Projects and Engineering and Construction (E+C).

Construction continued to be the largest cluster in the group. It contributed 79.9% of group revenue in the year under review (2010: 82.8%).

Construction revenue decreased by 22% from R9,4 billion to R7,4 billion and core operating profit decreased by 26% from R650 million to R480 million. However, the group is pleased to be able to report only a slight decline in core operating profit margin as a result of good contract execution and avoiding low-margin contracts wherever possible. The overall Construction core operating profit margin percentage was 6.5% (2010: 6.9%).

Building and Housing

In spite of the private building sector remaining extremely weak, Building and Housing managed to partially mitigate this impact through the contribution from some 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). The segment reported a 38% decrease in core operating profit from the prior year, with core operating profit decreasing from R220,0 million to R136,9 million. This resulted in the overall core operating margin percentage decreasing from 6.9% to 6.4%. The operating margin in this segment held up due to the completion of large contracts, as well as the timeous and successful focus on securing new over-border and domestic contracts in public buildings and the educational and private healthcare sectors.

During the year, the private sector property market remained weak, which was exacerbated by the slowdown in government’s promised infrastructure spend and delays in awards of certain public private partnership (PPP) projects. A recovery over the next 12 to 18 months is expected.

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)).

Civil Engineering

Civil Engineering includes the group’s civil engineering activities in South Africa, the rest of Africa and the Middle East.

Civil Engineering reported a 25% decrease in revenue from R4,7 billion (83% local) to R3,5 billion (85% local), while core operating profit decreased by 20% to R231,9 million from R290,0 million. However, the group is pleased to report an improvement in core operating margin from 6.2% in the prior year to 6.5%.

This was due to successful execution and effective commercial management of large contracts in both the public and private sector despite additional once-off costs incurred in the rectification of a pipeline contract in Jordan. Although tendering activity is high and increasing, awards are currently infrequent.

In the Middle East, the group continues to be conservative in its treatment of the cancelled contracts which are progressing slowly to resolution, with cash already received by the group. Geographical expansion in the Middle East is progressing with due cognisance of the risk imposed by the recent political unrest in the region.

Civil Engineering’s secured one-year order book stands at R2,5 billion (57% local), compared to R3,0 billion (85% local) as at 30 June 2010. The full order book is at
R3,7 billion (58% local) (2010: R3,8 billion (80% local)). This is the largest order book of our Construction businesses.

Based on the group’s tender opportunity pipeline, it expects meaningful contract awards to realise over the next 12 to 18 months, both in terms of its target geographies as well as its targeted sectors of mining, industrial, power, oil and gas, water and environment, transport and real estate. The group therefore remains cautiously optimistic about future prospects.

Engineering

The Engineering cluster incorporates the Projects business and the newly-constituted Engineering and Construction (E+C) business.

Conversely to the rest of Construction, Engineering experienced a recovery in its markets. Revenue increased by 12% from R1,5 billion (50% local) to R1,7 billion (52% local). The increase in the South African content of the revenue resulted in a core operating profit decrease of 20% from R139,9 million to R111,5 million. The core operating profit margin percentage decreased to 6.7% (2010: 9.4%).

A recovery in enquiry levels from the sub-Saharan African mining and energy markets is underway, which resulted in recent new contract awards. This trend is expected to continue in certain mineral categories. There was also a significant progression in the South African power, oil and gas and mining markets over the last six months, which augurs well for a sustained recovery ahead, albeit lumpy in nature.

The secured one-year order book remained at R1,4 billion, with 75% being local compared to 30 June 2010 when 51% was local. The full secured order book stands at
R2,0 billion (83% local) (2010: R1,9 billion (64% local).

^ back to top ^