Basil Read Holdings : Basil Read faces down tough

Highlights

• The group ended the year with its strongest order book in nearly six decades, at a level of R12.5 billion from the previous year's R7.8 billion
• International operations are gaining momentum, with notable growth in Australia, Peru Colombia
• Judicious acquisitions in high-growth sectors

Construction and engineering company Basil Read has withstood another year of difficult trading conditions and global economic volatility, returning a satisfactory set of results for the period to 31 December 2011 and, overall, faring relatively well.

The board noted that while the economic recovery would be protracted and exacerbated by the marked slowdown in infrastructure projects in South Africa, the Basil Read group's strong order book and its equally strong relationships with clients, suppliers and subcontractors would enable it to manage these conditions effectively. That would be accompanied by stringent working capital management and fiscal discipline.

The year was characterised by fierce competition in the construction sector in the face of fewer projects and of lower value, widespread postponement of allocated contracts and a surplus of resources following the completion of numerous projects associated with the 2010 FIFA World Cup. However, the group was starting to see significantly more activity in power generation, mining and infrastructure and roads tenders were increasing as provinces were tasked with urgently improving the condition of South Africa's roads.

The group ended the year with its strongest order book in nearly six decades, at a level of R12.5 billion (2010: R7.8 billion), and secured several major contracts during the year. By the reporting date, the order book had risen to R14 billion (2010: R8.5 billion).

It reported revenue of R6.2 billion (2010: R5.4 billion), an increase of 15.6%. Operating profit decreased by 24% to R280.9 million (2010: R369.5 million), which translated into an operating margin of 4.5% (2010: 6.9%). Headline earnings were R172.9 million (2010: R259.1 million), a decrease of 33.3%. Adjustments to headline earnings include the impairment of goodwill relating to the acquisition of Sladden International (Botswana) (Pty) Limited, following a disappointing performance in the year under review and unsatisfactory forecasts. Earnings for the year decreased by 45.9% to R141.0 million (2010: R260.8 million).

Cash on hand on 31 December 2011 decreased to R653.8 million (2010: R978.7 million), as working capital levels rose, mostly due to a significant increase in trade and other receivables as a result of delayed payments from clients.

Despite a net repayment of debt to the value of R174.9 million (2010: R320 million), the group's debt levels increased by 30.4% to R1.0 billion (2010: R802.7 million), largely due to an increase in instalment sale agreements to fund expansionary capital expenditure on property, plant and equipment. Of the total capital expenditure of R647.9 million (2010: R422.8 million), R436 million (2010: R199.4 million) was financed with the remaining R211.9 million (2010: R223.4 million) being funded out of cash resources, further impacting the group's cash balances. Replacement capital expenditure for the 2012 year is budgeted at R200 million.

Under the domestic medium-term note programme, the group refinanced its maturing note of R125 million through the further issue of a R150 million note, maturing in July 2013. The group raised a further note of R100 million which, together with an existing note for R125 million, matures in June 2012 and has been classified as part of the short-term portion of interest-bearing borrowings. The group's debt equity ratio is currently at 29.7% (2010: 21.3%).

The group experienced moderate balance sheet growth, with total assets at a level of R4.9 billion (2010: R4.4 billion).

The board noted also that the group was still engaging with the Competition Commission and that the outcome was unknown. The group has, however, raised a provision for a possible penalty.

At the reporting date, the group had issued guarantees in the amount of R2.0 billion (2010: R2.0 billion). These guarantees arose in the ordinary course of business and it was not expected that any loss would arise out of the issue of these guarantees.

Basil Read (Pty) Limited and TWP Projects (Pty) Limited, the group's main South African operating companies, attained a level 3 BBBEE contributor rating, meaning that companies were entitled to recognise 110% of the amounts spent with these companies in calculating their procurement spending. The two companies were further rated as value-added suppliers, which afforded a further 25% benefit.

In construction, the group's largest division faced fierce competition. With fewer tenders on offer, and significant pressure on margins, the challenge was to secure new work and keep resources occupied. Given depressed local conditions, there was a natural progression from South Africa to other parts of Africa, where the need for quality construction groups was high, the board said.

Basil Read was now exploring niche markets with long-term prospects in infrastructural spending in Africa. With secured contracts in Botswana, Namibia, Zimbabwe, Democratic Republic of Congo and offices established in Mozambique and Zambia, the group was actively tendering for projects in Africa.

Results in the construction division were overshadowed by a number of unprofitable contracts in the roads division, resulting in end-of-site losses of R115 million for the year under review, primarily relating to a railway construction project in the Northern Cape, a roads contract in the Free State and a roads contract in Botswana. The group had claims against certain of these losses, but due to the uncertain nature of the outcome, no provision had been made for any potential recovery.

The division secured a number of contracts during the period, including the R3.1 billion multi-disciplinary contract to construct and operate an airport on the island of St Helena and the recently awarded phases 2C and 2H in terms of the Olifants River Water Resources Development Project for the Trans-Caledon Tunnel Authority, valued at R1.2 billion.

Basil Read's mining division remained a stable performer, with continuing contracts locally and in Botswana. This division plays an important role in the group by balancing fluctuations in the construction sector.

Rising commodity prices have boosted mining production significantly in the past year, resulting in a plethora of goods contracts for capable service providers.

Despite recent conditions in the South African mining industry, the division maintained its base of expertise by carefully managing its people and their deployment. This pool of specialist skills was a decided advantage in an industry characterised by a shortage of core skills and intense competition, the board said.

Basil Read Mining joined forces with Australian-based Leighton International and local Botswana company, Bothakga Burrow to form the Majwe Mining Joint Venture. Majwe was awarded a five year multibillion-rand mining-service contract with Debswana in Botswana where there were various growth opportunities on the horizon.

In a joint venture, the division secured a three-year contract at Assmang's Beeshoek mine. Mobilisation started in November 2011.

Blasting & Excavating again recorded an acceptable performance for the year, given sharply higher competition and price sensitivity. This company, with its established track record, was well placed to participate in South Africa's planned infrastructure upgrade.

Basil Read Developments has entrenched its reputation for developing sustainable communities, reflected in its Gauteng flagship project, Cosmo City - the first mixed-use, fully integrated sustainable human settlement in South Africa.

Given the government's commitment to eradicating informal settlements, this division was of strategic importance to the group, but despite the improved results, the year under review proved to be a frustrating one for the division. The affordable housing development sector was constrained by slow progress among provinces and municipalities in allocating and spending resources on projects in which the division had invested or for which it tendered. Added to that, the banks have tightened their lending criteria.

The engineering division had a slow start in the first two months of 2011, but the workload ramped up significantly in most TWP companies and performance for the year surpassed expectations. The division employed more than 300 professionals in the year under review, taking the total staff complement to 1 200. The increased workforce reflected a deliberate strategy to maintain capacity during the downturn, sacrificing short-term profitability for long-term gains, the board said.

TWP continued to expand locally and internationally in the mining and infrastructure sectors, with its Peru office recording a profit in its first year of trading.

Within South Africa's borders, TWP was managing a considerable number of shaft projects, including its flagship - Impala 17 shaft - the biggest shaft-sinking project under way in the world.

International operations were steadily gaining momentum. The branch in Australia, now 50% owned in joint venture with WSP (Pty) Limited, returned to profitability during the year, while the Peru office secured a number of new projects - including a gold plant in Colombia - and increased its staff complement to more than 120 people.

Basil Read's integrated growth strategy saw the group increasing and diversifying its products and services with a streamlined approach that extends to some of TWP's newer initiatives. For this reason the group made several investments and divestitures in 2011.

In January 2011, the group disposed of 100% of Basil Read Contracting (Pty) Limited for a consideration of R94 million, realising a profit on disposal of R4.5 million.

The group acquired a 35% share in Metrowind (Pty) Limited, a provider of alternative energy sources, for R10 million. Metrowind was announced as a preferred bidder for the supply of alternative energy by the Department of Energy and was in the process in developing a wind farm in the Nelson Mandela Bay Metropolitan area, which should realise a R450 million EPC contract for the group.

In June 2011, the group disposed of 30% of its stake in Newport Construction (Pty) Limited to a local BEE partner for R2.0 million and resulted in the recognition of a gain on transactions with non-controlling interests of R0.4 million.

In September 2011, the group bought the remaining 12.5% of TWP Australia (Pty) Limited for no consideration, realising a loss on transactions with non-controlling interests of R3.2 million. Subsequent to this acquisition, the group disposed of 50% of the company to WSP (Pty) Limited for a sale consideration of R5.7 million. Due to the recovery of previously recognised losses, the group recorded a profit of R33.1 million and the renamed entity, TWSP (Pty) Limited, was reclassified as a jointly controlled entity. The group's new partner, WSP (Pty) Limited is one of the world's largest design, engineering, environment and energy consultancies with 9,000 staff in 200 offices across 35 countries.

In December 2011, TWP disposed of its 74% share in TRG Trading (Pty) Limited for no consideration, realising a loss on disposal of R13.1 million.

Basil Read's robust safety/health/environment/quality system was being integrated across the group after a period of rapid organic and acquisitive growth. In the preceding year, risk management was incorporated into the safety, health and environment division, aligning its governance processes with the recommendations of King III and reinforcing the group's commitment to an integrated approach focused on zero harm.

In the past three years, the disabling-injury frequency rate has dropped from 0,58 in 2009 to 0,4 in 2011. While this falls short of the target set at 0,3 for the review period, it is consistent with results for 2010.

Looking ahead, the board noted that while the economic uncertainty of the past couple of years prevailed, the government's commitment to infrastructural spending boded well for the sector. Given the delays in the roll out of projects, the group was "cautiously optimistic".

Fundamentals in the construction sector remained challenging with a real recovery only expected from 2013. Against this background, Basil Read remained committed to continued expansion, underpinned by a strong order book. As a sector, operating performances in construction were likely to continue to be affected by high cost increases and greater competition. To counter the difficult conditions, the group was concentrating on retaining skills, maximising efficiencies and maintaining capacity for the eventual turnaround, the board said.

The group would continue its pursuit of contracts on the African continent within its defined set of risk parameters, which include the certainty of committed funding for the contract in question and upfront payments.

The mining industry should remain buoyant through 2012, the board said. Demand was outstripping supply in most commodities and, compounding this, many projects had to be executed to replace mining output, let alone increase it. South America, Africa and Australasia should all record significant growth over the year, it said, and infrastructure development, on the back of mining activity, is expected to be significant, particularly in developing countries.

Key to Basil Read's continuing success will be the effective management of working capital and a commitment to the reduction of debt. Delayed payment from mostly government clients put pressure on cash flow, but the group was working closely with these clients to resolve issues.

Favourable factors included an order book of R14 billion at the reporting date, a resurgent mining sector on the back of high commodity prices and judicious acquisitions in high-growth sectors such as renewable energy. The group was also investing in future projects in the alternative energy sector and had submitted a Renewable Energy Feed-in Tariff (Refit) phase two bid for a solar powered development in Beaufort West, in conjunction with the BW Energy Corporation, which if successful, could translate into a further R1.5 billion construction contract.

The board was confident that the building blocks were in place for continued growth as the local construction industry recovered and international expansion initiatives gained traction.

Client contact: Donny Gouveia 011 418 6300
PR contact: Loll Thomson 011 467 2133