Five : announces interim results to December 2016

Group Five announces interim results to December 2016

22 February 2017

Group Five's results for the first six months of F2017 was materially below expectations, with a trading loss compared to a profit in the prior comparable period.

Group Five's results for the first six months of F2017 was materially below expectations, with a trading loss compared to a profit in the prior comparable period.

This loss was as a result of:

• The recognition of the group's financial socio-economic contribution of R255 million in terms of the agreement reached with the government of South Africa to implement a programme of initiatives that will significantly accelerate transformation of the South African construction sector
  • Although payment will occur over a 12-year period, the total liability has to be recorded in the current reporting period, as it is the period in which the obligation has been incurred. R152,7 million, reflecting the net present value of the liability, was charged in full against earnings in this reporting period
• The commercial close out and final settlement of certain long-outstanding South African public sector contracts which negatively impacted operating profit by R244 million
• Excluding the impact of these two transactions, there was also a reduction in profitability from the underlying Engineering & Construction (E&C) operations of R172 million
• The group's Manufacturing cluster delivered an improved result in markets that remain flat. The Investments & Concessions cluster continued to perform well on the back of a continued solid performance by the European operations

The group also announced that Eric Vemer, the current CEO, will be leaving the company in the next few weeks. Eric and the board will be working towards transitional arrangements which will result in the identification of a suitable replacement candidate.

Willie Zeelie, currently an exco member and Engineering & Construction executive director, will be leaving the company on 31 March 2017. Willie will continue working with Group Five under a consultancy agreement for 12 months after that.

Mark Humphreys will be appointed as the E&C exco member with effect from 31 March 2017 and remains the chief operations officer for E&C.

CEO Eric Vemer, said:

'A number of exceptional items recorded in this reporting period, together with operating losses incurred by the Projects and Civil Engineering segments, the impact of continuing weak order book intake in the Engineering & Construction cluster as a whole and the resultant under-recovery of direct and indirect overheads have weighed heavily on these results.

'Reported operational shortcomings within the Engineering & Construction cluster have been firmly dealt with in the period. Short term action include an intensive focus on discipline in contract management and tight cost control, improved management review levels and heightened accountability and action on non-performance.

'An additional programme of restructuring has been developed in H1 F2017 and is being implemented in H2 F2017. This restructuring will primarily impact Engineering & Construction and group support functions, further reducing overhead costs and complexity in the group.

'As announced today, I will move on to new opportunities, but will assist the board during the transition and search for a new CEO.'

Looking forward, Vemer said:

'The group retains its focused strategy in general discipline-based construction, sector-led engineer, procure and construct construction, concessions, property development and manufacturing that is expected to deliver good growth and returns over the longer term. The group enjoys a complementary business portfolio that provides downside protection to earnings through tough times, diversification between Euro, US Dollar and Rand revenues, and strong leverage for growth and profitability in periods of infrastructure and resource market expansion.

'Group Five's attention is firmly focused on target clients and markets to secure the work that will deliver the value-enhancing growth that management seek, while improving our returns on capital employed across the group.'

The group's total secured Engineering & Construction Contracting order book stands at R9,6 billion (June 2016: R11,2 billion and December 2015: R11,8 billion). In addition, the group has R6,1 billion (June 2016: R6,1 billion and December 2015: R5,8 billion) in secured operations and maintenance contracts. The overall group reported order book at December 2016 therefore now stands at R15,7 billion (June 2016: R17,3 billion and December 2015: R17,6 billion).

The value of the group's target opportunity pipeline stands at R193 billion, with R97 billion of this pipeline currently in tender and pre-tender stage. This is higher than the R164 billion pipeline and R76 billion tender and pre-tender pipeline reported in June 2016. The pipeline indicates ongoing strong demand in power, transport sector, real estate and an improving mining sector.

YEAR UNDER REVIEW

FINANCIAL OVERVIEW

• Group revenue decreased by 19.7% from R7,3 billion to R5,8 billion
  • This was mainly due to decreased revenue from the Engineering & Construction cluster. Revenue from all this cluster's segments traded lower than the prior comparable period
• The group's core operating profit decreased from R315,1 million profit to a loss of R337,6 million
  • This was mainly due to:
    • the recognition of the group's financial socio-economic contribution of R255 million, charged to earnings at a net present value of R152,7 million
    • the commercial close out and final settlement of the long-outstanding New Multi Product Pipeline (NMPP) South African public sector contracts impacting operating profit negatively by R244 million
    • profits from the underlying Engineering & Construction operations not trading in line with expectations, impacting operating profit by R172 million
• Headline earnings per share (HEPS) decreased from a profit of 131 cents per share in H1 F2016 to a loss of 310 cents in the period under review, with fully diluted HEPS decreasing from a profit of 131 cents per share in H1 F2016 to a loss of 309 cents per share
• Earnings per share and fully diluted EPS decreased from a profit of 168 cents per share in H1 F2016 to a loss of 302 cents per share in the current period
  • The difference between earnings and headline earnings in the period was mainly as a result of a profit on the fair value adjustment of an investment property held as an associate, as well as profit on the sale of fixed assets
• The group's statement of financial position continues to be sound, with a nil net gearing ratio and a bank and cash balance of R2,8 billion as at 31 December 2016 (F2016: R3,3 billion and H1 F2016: R3,6 billion).
• The group's closing cash balance for the period is pleasing in light of a reduced rate of trade and contract awards. The group absorbed R317,3 million (H1 F2016: R214,6 million generated) cash from operations before working capital enhancements of R140,1 million (H1 F2016: R98,2 million).
• A dividend for this period of 14 cents per share (H1 F2016: 42 cents) was declared

OPERATIONAL OVERVIEW

Engineering & Construction - contributed 81.2% to group revenue (H1 F2016: 85.8%)

• Revenue decreased by 23.4% from R6,2 billion to R4,8 billion
  • Over-border work contributed 35% (H1 F2016: 29%) to cluster revenue
• The cluster made a core operating loss of R517,8 million (H1 F2016: R59,9 million profit)
• The core operating margin was -10.8% (H1 F2016: 1.0%)

Included within these reported results is the impact of the:

• financial contribution incurred as a result of the agreement reached with the government of South Africa
  • This impacted both the Building & Housing and Civil Engineering segments
• commercial close out and final settlement of previously-disclosed long outstanding South African public NMPP contracts, as reported to the market in the SENS announcement of 14 December 2016
  • A decision was taken by the group to enter into a settlement agreement on these suite of contracts instead of embarking on a protracted and expensive commercial and legal process to recover material costs incurred in previous periods.
  • This settlement agreement impacted the Civil Engineering and Project segments and, most materially, the Energy segment. The conclusion of this matter has allowed the group to remove non-performing assets, improve the group's balance sheet and ensure additional liquidity for the group, with uncertainty on outcome removed

In addition, the cluster's operating performance for the period under review was also impacted by:

• continued weak trading conditions, impacting the Civil Engineering, Projects and Energy segments, with a subdued order intake for the cluster during the period
• contract losses, affecting the Projects and Civil Engineering segments due to contract operational difficulties

Building and Housing

• Revenue decreased by 15.7% from R2,7 billion (100% local) to R2,2 billion (98% local)
• The segment reported a core operating loss of R79,3 million (H1 F2016: R34,6 million profit)
  • This was mainly as a result of accounting for the Building & Housing segment's portion of the financial contribution for the government of South Africa agreement
  • The overall core operating margin percentage decreased from 1.3% to -3.5%

The secured one-year order book stands at R4,4 billion (94% local) (F2016: R4,3 billion and 96% local; H1 F2016: R3,6 billion and 100% local). The total secured order book stands at R5,7 billion (95% local) (F2016: R5,6 billion and 95% local; H1 F2016: R5,0 billion and 100% local).

Civil Engineering

• Revenue decreased by 11.8% decrease from R1,3 billion (68% local) to R1,1 billion (59% local)
• Core operations generated a loss of R121,9 million (H1 F2016: R17,1 million loss)
• The overall core operating margin percentage weakened from -1.4% to - 10.9%

Civil Engineering's secured one-year order book stands at R1,6 billion (67% local) (F2016: R2,0 billion and 59% local; H1 F2016: R2,2 billion and 54% local) The full order book is at R2,0 billion (70% local) (F2016: R3,0 billion and 64% local; H1 F2016: R3,1 billion and 49% local).

Projects

• Revenue decreased from R1,3 billion (25% local) to R867,2 million (13% local)
• The core operating loss was R135,5 million compared to a R23,3 million profit in the previous period
• The core operating margin percentage was -15.6% (H1 F2016: 1.8%)

The secured one-year order book stands at R915,7 million (34% local) (F2016: R1,2 billion and 12% local; H1 F2016: R1,5 billion and 22% local). The full secured order book stands at R1,2 billion (46% local) (F2016: R1,5 billion and 22% local; H1 F2016: R2,1 billion and 15% local).

Energy

• Revenue decreased by 44.6% from R1,0 billion (56% local) to R566,5 million (8% local)
• The core operating loss was R181,1 million (H1 F2016: R19,1 million profit)
• Core operating margin was -32.0% (H1 F2016: 1.9%)
  • Included within these trading results are the costs related to the investment in future opportunities of R12,5 million

The secured one-year order book stands at R630,1 million (27% local) (F2016: R913 million and 12% local; H1 F2016: R1,1 billion and 9% local). The full secured order book stands at R781,7 million (41% local) (F2016: R1,2 billion and 22% local; H1 F2016: R1,6 billion and 6% local).

Investments & Concessions - contributed 9.6% to group revenue (H1 F2016: 8.1%)

• Revenue, which consists primarily of fees for the operation and maintenance of toll roads, decreased by 3.7% from R586,4 million to R564,4 million
• Core operating profit was 36.1% down to R145,5 million (H1 F2016: R227,5 million)
• Core operating profit margin decreased from 38.8% to 25.8%
  • The cluster delivered a solid underlying operating result on the back of a good performance from the European operations. The decrease in operating profit was as a result of a 51% decrease in the fair value upward adjustments recorded from the group's investment in service concessions period on period. The operating profit includes upward fair value adjustments on investments in service concessions of R74,9 million (H1 F2016: R153,8 million)

Manufacturing - contributed 9.2% to group revenue (H1 F2016: 6.1%)

• Revenue increased by 20.9% to R539,3 million (H1 F2016: R446,1 million)
• Core operating profit for the period increased by 25.0% to R34,7 million from H1 F2016 of R27,8 million
• Core operating margin was 6.4% (H1 F2016: 6.2%)

The Manufacturing cluster continued to experience the impact of a very tough market environment, with flat markets, import competition and substantial margin pressure.

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