Group Five sees slow recovery in second half

Mike Upton: Group Five CEO

Group Five CEO Mike Upton says although the first half of the financial year was "somewhat disappointing," he is encouraged by the uptick in the order book and expects a slow recovery in the second half of the year.

Releasing results for the six months ended December 2011 on Monday, the construction services, materials and infrastructure investment group reported a 44.2% decline in fully diluted headline earnings per share to 130 cents from 233 cents a year ago. 

An interim dividend of 22 cents per share was declared, down from 52 cents at the half year stage the previous year. 

Revenue from continuing operations was 3.6% lower at R4.407 billion, mainly due to a reduction in activity levels within the civil infrastructure markets, while operating profit from continuing operations including fair value adjustments was 40% lower at R219 million. 

Earnings per share were up, however, with EPS showing an 89 cents profit after a loss of 354 cents a year ago. 

The group's total operating margin was 5% compared with 8.1% at the first half stage a year ago. 

The group generated R236 million cash from operations before working capital changes, down from R417 million before and generated R355 million from operations. 

"We continued to implement our conservative approach adopted last year in terms of both the quality of the order book and cash preservation to fund activity supporting future profit growth. It is very encouraging to see a modest improvement in the construction order book, with the good cash position supporting this strategy. Furthermore, in line with our strategy of expanding our operations in Africa, we are also very pleased by the move in the over-border order book from 30% to 37%," Upton said. 

He noted that the overall group performance during the period was impacted by delayed construction revenue due to contract postponements and client scope changes in SA, as well as losses in Construction Materials and holding costs and losses from one previously reported contract in the Middle East. 

Construction, which comprises the business segments of Building and Housing, Civil Engineering and Engineering, continued to be the largest cluster in the group, contributing 81.5% to group revenue. 

Construction revenue decreased by 7.5% to R3.6 billion and core operating profit decreased by 62.1% to R109 million. Over-border work contributed 26% to revenue. The overall Construction core operating margin period on period declined from 7.4% to 3.0%. 

Construction's 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. 

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. The benefits of these initiatives will not be realised before F2013 

Its Building and Housing division revenue increased by 7.9, the Property Developments segment's revenue rose 6.8%, while the Manufacturing segment contributed 11.3% to group revenue. 

Civil Engineering, which includes the group's civil engineering activities in SA, the rest of Africa and the Middle East, reported revenue decreased by 34.7%. The division's result was 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. 

The company said the weakness in the general domestic construction and engineering markets in which it operates continued during the period, exacerbated by unpredictable delays in certain public infrastructure expenditure in SA as well as postponements in mining resource capital programmes. 

In contrast, the African mining resources, power and energy sectors are recovering. The group's emphasis on a larger geographic footprint for more of its business units in Africa has assisted all three construction segments in a small way to mitigate some of the domestic market weakness. 

The group, as previously advised, is in the process of disposing of the businesses that constitute the Construction Materials cluster and is in discussions with several parties. If successfully concluded, the disposals may have an effect on the price of the company's shares. 

Looking ahead, the group's total secured construction order book stands at R10.3 billion, up from R8.8 billion at end June 2011, and the construction one-year order book stands at R6.4 billion. 

The value of the target opportunity pipeline stands at R144 billion, up from R134 billion in August 2011, with activity in all its markets. 

The Investments and Concessions cluster is delivering annuity business growth, with group-wide opportunities in active infrastructure sectors in increasingly more geographies, the group said. 

Manufacturing has been re-focused and its performance is improving on higher sales volumes to a broadening number of markets. 

The disposal of the loss-making Construction Materials business would relieve the cash drain from this segment on the Group and improve returns once completed, it added. 

"Against what will continue to be volatile markets, management has a number of key focus areas in place, which include driving the sale of Construction Materials to reduce operating cash losses and improve returns, reducing the Middle East drain, further reducing the internal cost base and preserving cash to fund future growth and geographic expansion in all segments," said Upton. 

"Based on our positioning in the key infrastructure growth sectors of power, mining, oil and gas, water and transport and in the concessions market for specific projects, as well as the progress made in terms of improving the group's internal efficiencies, management expect a slow recovery in group activity levels from the second half of F2012. This should support some improvement in our trading performance for F2013. However, the timing of this recovery is dependent on the timing of awards on visible projects," he concluded. 

At 11:30 on the JSE. Group Five's share price was at R26.35 - up 40 cents, or 1.54%.