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Group Five eyes Africa as profit falls

Feb 12, 2015

 THERE was more bad news for SA’s moribund construction and engineering industry on Wednesday as Group Five reported that core operating profit had plunged 35.5% to R216m in its interim results to December last year.

The JSE-listed construction and engineering group, which also reported that net profit fell to R146m from R219m previously, said on Wednesday it had seen a "particularly weak operational performance in civil engineering". Meanwhile, Aveng, SA’s largest construction company by turnover, also said on Wednesday in a trading statement that it expected headline earnings per share to plummet by between 55% and 60% in its interim results ending December — compared with the period in 2013.

This was significantly worse than its earlier anticipated plunge in headline earnings per share for the period of "at least 45%" from previously, after it reported low levels of infrastructure spend in SA, lower mining activity, labour disruptions and problems with legacy contracts.

New Group Five CEO Eric Vemer said on Wednesday the civil engineering business was the company’s problem child, with retrenchment costs and contract finalisation costs having hurt the results. He said the group had difficulty with some projects in SA and the rest of Africa, including the commercial close-out of two renewable energy projects.

Mr Vemer said that Group Five expected to derive 60% of earnings outside of SA in the next 12 to 24 months. The country made up 50% of the group’s existing order book of R18bn, with the remainder of projects from the rest of Africa and from Eastern Europe.

But Mr Vemer said Group Five’s woes were mainly because government’s R4-trillion infrastructure plan to 2027 was still in traction. "We have not seen the big projects come to market," he said, referring especially to ports and national roads.

On balance, the group said engineering and construction had performed "in line with expectations". It reported "solid" results from its manufacturing unit despite poor markets. It also saw improved earnings from its investment and concessions tolling businesses in Eastern Europe.

On the bright side the group had received a notice to proceed on the R4.6bn engineering, procurement and construction award for the Kpone independent gas-cycle power project in Ghana.

Consulting Engineers SA (Cesa) president Abe Thela told an annual media briefing on Wednesday that a lack of capacity, skills and coordination across government meant infrastructure spending had been plagued with cost inefficiencies that had gouged R200bn off the state’s R846bn spend in the medium-term expenditure framework. Added to this was a reported R30bn that was missing from the fiscus through corruption, he said.

The lack of work means that there is fierce competition in the industry, resulting in increasingly thin margins for major players. This has led the country’s construction companies to seek work elsewhere in Africa and further afield.

Cesa acting CEO Wallace Mayne said on Wednesday that "government is just not releasing enough projects to keep Cesa going. In our view the government is not technically capacitated — there are very few engineers left in the public sector." Nedbank Capital said late last month that spending on new infrastructure in SA halved last year compared with 2013.

It found that the private sector contributed 77% of the 65 new projects worth R95.4bn announced last year. This was down from 85 projects worth R187.9bn in 2013. In the public sector new projects announced last year were worth R10.5bn, significantly down on the R42.4bn spent in 2013.

Along with the rapidly declining price of mineral commodities, such challenges are likely to cause even greater uncertainty in the country’s mining, steel and construction sectors.

 

Source: Business Day

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