Group Five delivered a pleasing improvement in earnings for the full year to June 2016 due to an exceptional result from the Investments & Concessions cluster, boosted by significant fair value profit realized from the group’s Eastern European project investment portfolio.
Group Five’s aim is to be:
• Africa’s leading infrastructure project development, construction and concessions group
• Southern Africa’s leading lightweight dry building materials manufacturer
• The leading African and European specialist toll motorway development, investment and operating company
They are focused on optimizing their use of capital and generating returns on capital employed that are value-enhancing to shareholders.
Commenting on the results, Group Five CEO Eric Vemer, said:
“These results bear testimony to our strategy of investing and operating across the infrastructure value chain, which enables the generation of an improved blended group operating margin and the delivery of annuity income to deliver sustained returns. During the year, our Investments & Concessions business especially proved its value in our portfolio, with its performance again balancing the cyclicality of construction earnings and providing a strong underpin to our overall group results”.
“As a management team, we are continually reviewing our strategy to ensure it remains relevant to changing market landscapes and client requirements, as well as enhancing shareholder value. Our portfolio of assets is therefore tested for its strategic fit and ability to create acceptable return on investment. During the year, a working group with the board and management was created to focus on this”.
“We believe we are set to deliver strong growth and returns over the longer term, with 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.”
Looking forward, Mr Vemer said:
“Following a period of introspection and cost-reduction, our attention is again more firmly focused outwardly on target markets and securing the orders that will deliver the value-enhancing growth management seek, while improving our returns on capital employed across the group”.
“Alongside our South African focus, we have a clear geographic strategy of expanding into high-growth countries in the rest of Africa and Europe. Our localisation strategy is organic, which does not require material capital investment. We take a long term view and are prepared to spend development time and capital in partnership with other project developers to secure a preferred position and role in developing, implementing and operating new infrastructure assets. Our continued expansion in these markets is based on our proven and growing experience in the delivery of complex multi-disciplinary, internationally-financed contracts in difficult geographies with complex logistical and local challenges. We have a track record of operating in-country and growing local employees through the establishment of a permanent presence in key target countries. Prime examples are Ghana, Poland and Hungary.”
The group’s total secured Engineering & Construction contracting order book stands at R11,2 billion (December 2015: R11,8 billion, June 2015: R14,1 billion). In addition, the group has R6,1 billion in secured operations and maintenance contracts (December 2015: R5,8 billion, June 2015: R4,7 billion). The overall group reported order book at June 2016 therefore stands at R17,3 billion (December 2015: R17,6 billion, June 2015: R18,8 billion).
YEAR UNDER REVIEW
• Group revenue remained largely unchanged at R13,8 billion (F2015: R13,9 billion).
• Increased revenue from the Investments & Concessions cluster and the Projects segment within the Engineering & Construction cluster were offset by decreased revenue from the Manufacturing cluster and the Civil Engineering and Energy segments within the Engineering & Construction cluster. Revenue from the Building & Housing segment remained flat for the year.
• Core operating profit increased by 111.4% from R348,4 million to R736,5 million.
• Mainly as a result of the stronger fair value profit realized on service concessions (R730,1 million) and fair value gains on investment property (R43,5 million), compared to those reported in the previous period (F2015: R115,7 million and nil respectively).
• The stronger fair value profit, along with a solid operating performance across all project operations, resulted in the Investments & Concessions cluster’s core operating profit increasing by 287.7% to R917,4 million.
• This record performance was diluted by the weaker result from the Engineering & Construction cluster, which reported a core operating loss of R236,9 million, mainly as a result of a core operating loss in the Civil Engineering segment of R381,2 million.
• Although the Civil Engineering segment returned to a break-even operating performance in H2 F2016 after reporting losses of R17,1 million in H1 F2016, its results were impacted by a R365,4 million provision for a potential impaired debt.
• Overall core operating margin increased from 2.5% in the prior year to 5.3%. Total reported operating margin increased from 2.6% to 5.2%.
• Headline earnings per share (HEPS) of 335 cents represents an increase of 63.6%, and fully diluted HEPS (FDHEPS) of 335 cents per share an increase of 64.2% compared to the HEPS and FDHEPS of 205 cents and 204 cents per share respectively for F2015.
• Earnings per share (EPS) of 375 cents and fully diluted EPS (FDEPS) of 375 cents per share represents a 69.0% and 69.7% increase respectively over the 222 cents per share and 221 cents per share for F2015.
• The difference between earnings and headline earnings in the year is mainly as a result of a profit on the fair value adjustment of an investment property and profits on sale of fixed assets, offset by a loss on a partial dilution from a shareholding in an associate.
• The statement of financial position continues to be sound, with a nil net gearing ratio and bank and cash balance of R3,3 billion as at 30 June 2016 (F2015: R3,4 billion and H1 F2016: R3,6 billion).
• The cash flow position is pleasing.
• The group generated R449,4 million (F2015: R425,1 million) cash from operations before a minimal level of working capital enhancement of R30,2 million (F2015: R118,9 million).
• This resulted in a net cash inflow from operating activities of R146,3 million (F2015: R238,1 million) after settlement of taxation liabilities and the dividend to shareholders.
• A dividend for this period of 30 cents per share (H2 F2015: 25 cents) was declared based on an adjusted earnings per share. The full-year dividend is therefore 72 cents (F2015: 55 cents).
Engineering & Construction – 85.0% of group revenue (F2015: 85.3%) and an operating loss of R236,9 million (F2015: R43,8 million profit)
• Revenue remained largely unchanged at R11,8 billion (F2015: R11,9 billion).
• Over-border work contributed 32% (F2015: 26%) to cluster revenue.
• While there was an improvement in order book intake during the latter part of the financial year, most of F2016 was characterized by order book decline, with the resultant negative operational gearing weighing on the cluster results.
• Additional retrenchment costs were incurred, which further weighed on reported results.
• The cluster delivered an operating loss of R236,9 million (F2015: R43,8 million profit).
• Prior to a R365,4 million provision made for a problematic debtor in Civil Engineering, the cluster performance stabilised with an overall operating profit of R128,5 million or a 1.1% core operating margin. (F2015: R43,8 million or a 0.4% core operating margin).
Sadly the cluster reported four fatalities within the year, all having occurred within our sub-contracting and supplier base. Focused action has been taken to address sub-contractor safety performance and consequence management, and in maintaining our relentless efforts to ensure a safe working environment for all our employees, sub-contractors and contract partners. The group supported the families of the deceased through this difficult period.
Building and Housing
• Revenue remained flat at R4,9 billion (100% local).
• The segment reported a 18.5% decrease in core operating profit from R91,4 million last year to R74,5 million.
• This resulted in the overall core operating margin percentage decreasing from 1.9% to 1.5%.
The secured one-year order book stands at R4,3 billion (96% local) (H1 F2016: R3,6 billion and 100% local) (F2015: R4,4 billion and 100% local). The total secured order book stands at R5,6 billion (95% local) (H1 F2016: R5,0 billion and 100% local) (F2015: R6,1 billion and 100% local).
• Revenue decreased by 6.5% from R2,7 billion (62% local) to R2,5 billion (63% local).
• Core operations generated a disappointing loss of R381,2 million for the year (F2015: R96,3 million loss).
• The Civil Engineering segment returned to a near break-even operating performance in H2 F2016 after reporting losses of R17,1 million in H1 F2016. However, the segment’s results were impacted by a R365,4 million provision for a potential impaired debt. Given uncertainty surrounding the recoverability of this previously-certified debtor, the board and management have deemed it appropriate to raise a provision against the carrying value of this debtor until resolution is achieved. Included within the operating losses are retrenchment and holding costs.
Civil Engineering’s secured one-year order book stands at R2,0 billion (59% local) (H1 F2016:
R2,2 billion and 54% local) (F2015: R2,1 billion and 58% local). The full order book is at R3,0 billion (64% local) (H1 F2016: R3,1 billion and 49% local) (F2015: R3,3 billion and 53% local).
• Revenue increased by 10.4% from R2,2 billion (30% local) to R2,4 billion (26% local).
• Core operating profit increased by 79.3% from R20,4 million to R36,6 million.
• Although the core operating profit margin percentage increased to 1.5% (F2015: 0.9%) the traded operating margin is much lower than historically reported, with a reduction in margin in the second half of the year largely due to an increase in the portion of the current order book being executed in South Africa and in neighbouring regions, which traditionally delivers lower margins than those in the rest of Africa and from the Kpone contract which is in its early stages of completion.
The secured one-year order book stands at R1,2 billion (12% local) (H1 F2016: R1,5 billion and 22% local) (F2015: R2,0 billion and 23% local). The full secured order book stands at R1,5 billion (22% local) (H1 F2016: R2,1 billion and 15% local) (F2015: R2,8 billion and 18% local).
• Revenue decreased by 10.0% from R2,1 billion (77% local) to R1,9 billion (42% local).
• Core operating profit increased by 17.3% from R28,3 million to R33,2 million.
• Core operating profit margin was 1.7% (F2015: 1.3%).
Included within these trading results are the costs related to investment in future opportunities and capacity building for nuclear readiness. Progress on the Kpone power project in Ghana continues to proceed in line with plan, with the contract remaining on track for completion in F2018.
The secured one-year order book stands at R913 million (12% local) (H1 F2016: R1,1 billion and 9% local) and (F2015: R1,3 billion and 21% local). The full secured order book stands at R1,2 billion (22% local) (H1 F2016: R1,6 billion and 6% local) (F2015: R1,9 billion and 14% local).
Investments and Concessions – 8.3% (F2015: 7.1%) of group revenue, and 124.6% of group core operating profit (F2015: 67.9%)
The Investments & Concessions cluster delivered a record-breaking result for the year. In addition to the substantial fair value profit realised on the cluster’s motorway investments in Eastern Europe, operating results were excellent across all business segments including G5 Properties, with Intertoll Europe’s performance being particularly noteworthy.
• Revenue, which consists primarily of fees for the operation and maintenance of toll roads, increased by 15.2% from R995,1 million to R1,1 billion.
• The core operating profit margin increased from 23.8% to 80.0%, on the back of core operating profit of R917,4 million (F2015: R236,6 million).
• The operating profit includes fair value gains on investment property held of R43,5 million and investment in service concessions of R730,1 million, totalling R773,6 million (F2015: R115,7 million).
Manufacturing – 6.8% (F2015: 7.6%) of group revenue and 7.6% of group core operating profit (F2015: 19.5%)
The Manufacturing cluster continued to experience the impact of a very tough market environment, which impacted volumes and revenues. Ongoing innovation was essential to decrease manufacturing costs in line with declining market demand and rising imported material costs of production.
• Revenue decreased by 11.7% from R1,1 billion to R935,3 million.
• The reported core operating profit for the year was R56,0 million. This was 17.5% lower than the prior year core profit of R67,9 million.
• The core operating margin was 6.0% (F2015: 6.4%).