Operational review

GROUP

The Group’s businesses performed broadly in line with management expectations and in accordance with the guidance provided in November 2011 when all construction margins were guided down.

Group-wide restructuring and cost cutting, without losing core capacity, had a net cost in the first half. The benefits will only be realised from H2 F2012 and F2013. In addition, the Group has purposefully continued to carry costs related to its investment in future opportunities and capacity building. The benefits of these initiatives will not be realised before F2013.

As expected, the period’s results were impacted by losses in the Construction Materials segment. The Civil Engineering results have been impacted in short term by losses on a Jordan pipeline contract and holding costs in the Middle East deployed to manage out legacy contracts.

INVESTMENTS AND CONCESSIONS

Investments and Concessions consists of Infrastructure Concessions and Property Developments. This cluster contributed 7.3% (H1 F2011: 6.2%) to group revenue.

Infrastructure Concessions

In spite of sluggish domestic concessions and PPP activities and the economic pressures in Europe, Infrastructure Concessions performed ahead of expectations as new tolling contracts came on line in Eastern Europe.

Revenue increased by 13.8% to R306 million (H1 F2011: R269 million), core operating margin improved to 25.8% (H1 F2011: 20.3%), with core operating profit at R79 million (H1 F2011: R54 million). The changes in the carrying value of concession assets are regarded and accounted for globally as a core component of the concessions business. Included in core operating profit are upward fair value adjustments on service concessions of R39 million (H1 F2011: R10 million).

Eastern European and growing African concession opportunities are set to remain attractive, with further new projects under development in transport projects and power.

Going forward, the timing of awards in the South African public sector buildings and healthcare PPPs and transport concession markets remains uncertain in light of current delays and unconvincing government policy and commitment. The uncertainty over whether the N1/N2 Winelands toll road project, awarded to the consortium led by Group Five, will go ahead, is just one example.

The outcome of the government’s deliberations on the resolution of the Gauteng Freeway Tolling impasse and of the recently established Presidential Infrastructure Coordinating Commission will be crucial for the construction sector and job creation.

The group is, however, encouraged by the private sector’s commitment to renewable energy. The Group is well positioned to participate. It will be crucial for this programme to meet the stated deadlines for quick adjudication and award to pre-qualified bidders who are able to demonstrate bankability.

Property Developments

Property Developments’ revenue increased by 6.8% to R15 million (H1 F2011: R14 million) and core operating profit to R10,2 million (H1 F2011: R4, 2 million loss). Included in core operating profit is an upward fair value adjustment on property developments of R11 million (H1 F2011: nil).

Property Developments returned to profitability in line with the Group’s stated expectations. The Group continues to progress its strategy of disinvestment from the traditional residential sector in favour of securing A-grade commercial and retail property development positions in targeted geographies.

MANUFACTURING

Manufacturing consists of building products business, Everite, as well as steel fabrication businesses BRI and Group Five Pipe. Manufacturing contributed 11.3% (H1 F2011: 8.9%) to Group revenue.

Revenue increased by 22.4% from R405 million to R496 million. Core operating profit decreased by 32.0% from R32 million to R22 million, resulting in a core operating margin of 4.4% (H1 F2011: 7.9%). Core operating margin for H2 F2011 was a loss of 1.2%.

Investments in production technologies, product range extension and the closure of the troubled steel fabrication facility have led to improving competitiveness and domestic and export market growth. An increase in volumes traded in Everite and BRI during the reporting period lifted the manufacturing performance from the last reported results. Group Five Pipe remains tied to large water transport project demand, which exhibits some loading unpredictability in the short term.

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.

CONSTRUCTION

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

Construction continued to be the largest cluster in the group, contributing 81.5% to Group revenue (H1 F2011: 85.0%).

Construction revenue decreased by 7.5% from R3,9 billion to R3,6 billion and core operating profit decreased by 62.1% to R109 million (H1 F2011: R288 million). Over-border work contributed 26% (H1 F2011: 25%) to Construction revenue. The overall Construction core operating margin period on period declined from 7.4% to 3.0%. The core operating margin in H2 F2011 was 5.5%.

Construction performance was impacted by delayed revenue due to postponements in domestic contract awards and customer-initiated scope change delays, as well as holding costs and losses in the Middle East from one contract as previously reported. In addition, the Group purposefully continued to carry costs related to its investment in future opportunities and capacity building in renewable power, nuclear readiness, postponed local and new over-border PPPs, as well as oil and gas and geographic expansion. As stated above, the benefits of these initiatives will not be realised before F2013.

Building and Housing

Revenue increased by 7.9% from R1,2 billion (79% local) to R1,3 billion (80% local). Core operating profit decreased by 63.4% to R33 million.

(H1 F2011: R91 million), resulting in a core operating margin of 2.6% (H1 F2011: 7.5%). Core operating margin for H2 F2011 was 4.9%.

During the period, the private sector property market for buildings remained weak and overtraded, with inherently low margins and unattractive cash flows. This has been coupled with the slowdown in government’s promised infrastructure spend and the lack of awards of certain PPP concession projects, including large public buildings, healthcare and correctional services. The Group has been declared the preferred bidder on some of these projects.

The coastal region performed well, although margins were constrained.

The Building and Housing segment established an over-border capability in new markets, which will mitigate some domestic market decline.

In the short term the Building business will be under pressure while markets are further developed and while new awards against tenders under adjudication are awaited.

The Housing business has, however, seen a recent marked improvement in domestic mining and affordable and RDP housing work load.

The secured one-year order book stands at R2, 4 billion (85% local) (FY 2011: R2,1 billion and 88% local) and total secured work at R3,6 billion (77% local) (FY 2011: R3,1 billion (75% 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 revenue decreased by 34.7% from R1, 9 billion (86% local) to R1,2 billion (78% local). Core operating profit decreased by 75.4% from R130 million to R32 million, accompanied by a decrease in overall core operating margin to 2.6% from 7.0% in the corresponding period and 6.1% in H2 F2011.

As outlined above, the Civil Engineering result has been impacted by revenue and margin shifting out in time due to late contract awards and hence delayed starting times, as well as scope changes on several large domestic projects.

Against this, the underlying South African and African business delivered well on contracts executed in the period.

In the Middle East slow but positive progress continues to be achieved in contract resolution, including cash recovery. The Jordan pipeline project, however, has returned further losses. This project is in the process of being terminated by mutual agreement with the contracting parties. In addition, costs are being expensed as they occur for the commercial resources deployed in Dubai which continue working through the contractual finalisation and cash collection of completed, but not commercially closed, as well as terminated contracts.

Although tendering activity is high and increasing in South Africa and the rest of Africa, awards are currently infrequent. The business is proactively mitigating domestic market conditions by progressively rebuilding its African order book in geographies in which the Group has prior operating experience and where growth opportunities are stronger.

The Group expects meaningful contract awards and margin improvement in Civil Engineering to realise over the next 12 months derived from intervention in the Middle East and its South Africa and Rest of Africa tender opportunity pipeline in targeted sectors of mining, power, water and environment and transport.

Civil Engineering’s secured one-year order book stands at R2,5 billion (48% local) compared to R2,5 billion (57% local) as at 30 June 2011. The full order book is at R4,1 billion (48% local) (FY 2011 R3, 7 billion (58% local)).

Engineering

The Engineering cluster is the Group’s engineering and plant building segment and incorporates the Projects business and the Engineering & Construction (E+C) business.

Engineering is experiencing a recovery in enquiry levels from the sub-Saharan African mining and energy markets, which resulted in new contract awards during the period under review. This trend is expected to continue in various mineral categories, technologies and geographies. This augurs well for a sustained recovery ahead, albeit lumpy in nature.

During the period, revenue increased from R805 million (44% local) to R1,1 billion (62% local), with core operating profit decreasing by 34.8% from R67 million to R44 million. Core operating margin decreased to 4.1% (H1 F2011: 8.4%). Core operating margin for H2 F2011 was 5.2%.

Although the underlying contract margins are still good, they reflect increased competition. The margin for the period was also impacted by the high costs incurred in bidding for the many renewable energy projects against the REFIT (renewable energy feed-in tariff) programmes and building capacity in nuclear. The margin retraction on higher revenues is temporary and should improve over the next 12 months.

The E+C business has bid with a number of the power plant developers who have pre-qualified under the REFIT 1 programme. Contract awards are expected in H1 F2013. Further bids will be submitted under the REFIT 2 programme in March 2012.

The secured one-year order book was maintained at R1,4 billion (64% local) (30 June 2011: R1,4 billion secured work) (75% local). The full secured order book stands at R2,6 billion (66% local) (FY 2011: R2,0 billion (83% local)).

BASIS OF PREPARATION

These consolidated condensed interim financial statements for the six months ended 31 December 2011 have been prepared in accordance with IAS 34, “Interim Financial Reporting” and in the manner required by the Companies Act of South Africa. The consolidated condensed interim financial information should be read in conjunction with the annual financial statements for the year ended 30 June 2011, which have been prepared in accordance with International Financial Reporting Standards (IFRS). The accounting policies applied are consistent with those of the annual financial statements for the year ended 30 June 2011, as described in those financial statements.

The above information has not been reviewed or reported on by Group Five’s auditors.

BOARD CHANGES

There were no changes to the board of directors during the period under review.

ACKNOWLEDGMENTS

The group wishes to recognise the hard work and commitment of its employees.

On behalf of the board

Board of directors: P Buthelezi* (Chairperson), MR Upton (CEO), CMF Teixeira (CFO), LE Bakoro*, L Chalker*†, Dr JL Job*, OA Mabandla*, SG Morris*, KK Mpinga*•,
DDS Robertson*† *(Non-executive director) † (British) •(DRC)

Transfer secretaries: Computershare Investor Services (Pty) Ltd, 70 Marshall Street, Johannesburg 2001

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