Group Five soars on Europe operations

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Group Five more than doubles core operating profit in the year to June on what it says is an 'exceptional result from its investments and concessions cluster in eastern Europe.

This rocketed to 111%, from R348m to R736m, mainly as a result of the stronger fair value profit realised on toll road concessions. But the stock rose a subdued 2% at the close on Monday after substantial losses in its engineering and construction businesses took the gloss off the overall results.

CEO Eric Vemer said the bulk of group performance was driven out of Europe. In future, this would include a concession road project in Northern Ireland. Group Five had equity in some of these projects and garnered annuity income from them.

“It’s a very good result from the group, driven by very strong underlying project cash flows,” he said. Tolling projects in Poland and Hungary became operational in the period. Meanwhile, the weaker rand had boosted returns in the Polish and Hungarian currencies.

The JSE-listed construction and engineering company said it had R6.1bn in secured operations and maintenance contracts, up from R5.8bn in December 2015. However, most of the company’s earnings metrics had rocketed amid a 1% decline in gross revenues and an 8% fall in the order book from June 2015.

Fully diluted earnings per share were up 64% in the 12 months.

Vemer said government spending on infrastructure projects was the key to any recovery in the heavy construction sectors. But a general lack of spending in this area and slow payment by customers — in SA and the rest of Africa — dragged on the results. The group’s civil engineering segment was affected by a R365m provision for a potential impaired debt. The company said given the uncertainty around the recoverability of this “previously certified, but now problematic debt … the board and management had deemed it appropriate to raise a provision against the carrying value of the debtor until resolution was achieved”.

Group revenue was largely flat at R13.8bn. Group Five saw decreased revenue from its manufacturing cluster and the civil engineering and energy segments within its engineering and construction cluster, while revenue from the building and housing segment also remained flat for the period.

Ron Klipin, portfolio manager at Cratos Capital, said that apart from the fair value adjustments on European toll roads, the results were indifferent due to a lack of infrastructure spend by both the government and the private sector in SA. But he said Group Five had a good and experienced management team.

Momentum SP Reid analyst Dexter Mahachi said Group Five’s investment and concessions business “showed remarkable year-on-year growth”.

“The manufacturing and building and housing divisions appear to have been the only other divisions to show above target range performance in terms of margins. We are generally positive on the results, but remain wary at the reduced profitability of its core operations.”


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