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Basil Read records R820m loss in challenging market

Basil Read records R820m loss in challenging market

Photo by Duane Daws

27th March 2015

By: Megan van Wyngaardt

Creamer Media Contributing Editor Online

  

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A challenging construction sector, difficult contractual environment and poor operational performance have contributed to JSE-listed construction company Basil Read reporting an R820.9-million aftertax loss for the year ended December 31, 2014.

“Lossmaking contracts across all construction disciplines, coupled with a struggling engineering division, have overshadowed stable performances by the mining and developments divisions,” CEO Neville Nicolau said in a statement on Friday.

The company’s financial results were further impacted by a R304.4-million impairment of goodwill and an R80.6-million write-down of development land relating to the company’s investment in Rolling Hills Leisure Estate.

Cash balances reduced to R835.7-million, largely owing to the company funding lossmaking contracts. Liquidity remained tight but was being actively managed to ensure Basil Read continued to operate effectively.

However, at the reporting date, the company had issued guarantees of R2.2-billion, that have arisen in the ordinary course of business and that were not expected to lead to further losses. 

The results also included a P44-million bad debt provision, owing to one of it mining division’s clients, Discovery Metals, entering a voluntary administration process. Discovery Metals owned the Boseto copper project, in Botswana.

Basil Read’s mining division completed the de-establishment of its remaining equipment from the site. “With commodity prices expected to remain subdued in the short term, margins are likely to remain under pressure for some time,” the company said.

Meanwhile, the company reported that it had submitted a number of claims related to its lossmaking contracts, which were “being assessed or [are under] discussion.”

Speaking to Engineering News Online, Nicolau noted that these losses included its Trans-Caledon Tunnel Authority (TCTA) contract, which was the pipeline from the De Hoop dam to Steelpoort, losses from the Venetia project and some quite significant losses in its roadworks division.

When the company started with the TCTA project, the contract was valued at R1.35-billion; however, Basil Read had recorded a total project loss of R365-million, of which R320-million was in the 2014 financial year, on top of R45-million in losses in the previous year.

Completion of the project was expected by June, excluding technically challenging river crossing and rehabilitation work.

“Quite importantly, we have over R500-million in claims, which are delayed, largely, but not exclusivley, for not having access to the land to be able to build the pipeline,” Nicolau said.

Further, the company’s R175-million Venetia contract resulted in R38-million in losses. The project was substantially complete and demobilisation was in progress.

“The amount of work we did on this project almost doubled from what was originally quoted, which led to R68-million in claims submitted,” Nicolau pointed out.

The discussion with the client was ongoing and was likely to proceed to contractual processes.

However, Nicolau noted that the “real losses” were brought on by largely completed road contracts in Standerton, Platrand, Winburg and
Petrusburg, with a combined value of R1.4-billion.

The projects resulted in total combined project losses of R165-million with no opportunity to recover the losses.

“This resulted from a really complicated operating structure and taking our eye off the site management in Basil Read,” Nicolau said.

Despite these cash constraints, the company remained committed to continuing the various contractual processes to agree claims in a bid to extract maximum shareholder value.

The construction division had, meanwhile, been awarded contracts exceeding R1-billion since the start of the 2015 financial year.

The construction of an airport on St Helena Island was on track for completion in early 2016. Calibration flights would start in July this year. Basil Read had also signed a memorandum of understanding with the government of  St Helena to refurbish a hotel facility on the island.

SAVING GRACE
Overhead costs have been reduced through a rightsizing exercise to an appropriate level of administrative staff, satellite offices have been closed and a critical evaluation of the overhead cost-base has been performed to eliminate unnecessary expenditure.

The group was reorganised into an operational structure comprising two major divisions, construction and mining, assisted by a centralised support team.

“It was hard to see the operating lines,” Nicolau said, adding that costs were reduced from R586-million in 2014 to a budgeted R280-million for 2015.

This entailed a reduction from 9% of revenue, to 5%, while the staff complement was reduced fom 583 to 250.

This included 119 retrenchments, 82 voluntary separations, 25 resignations, 18 retirements and 89 jobs through the disposal of LYT Architecture.

The cost of overhead reduction was R38-million.

Basil Read also moved from a group and subsidiaries structure to a company and divisions structure. Subsidiaries were either being incorporated into the divisions or fixed and sold.

Basil Read’s Roadcrete Africa was fully incorporated into the company’s structure, while its Energy division was earmarked for disposal.

Its Matomo subsidiary would be closed down, as the company explored various options to rescue the engineering, procurement and management firm and found this to be the best option.

MINING DIVISION
Basil Read added that the past financial year was also challenging for contract mining service companies in sub-Saharan Africa. “Pressure on commodity prices and prolonged labour unrest have significantly reduced the number of new opportunities, with many existing projects being scaled back, delayed or stopped,” said Nicolau.

Further, the company highlighted that competition for work had intensified and, as a result, margins were under pressure.

However, the group noted that, despite difficulties in the sector, the mining division recovered in the second half of the 2014 financial year to produce a stable set of results with good revenue growth. 

The Majwe Mining joint venture (MMJV) continued to perform well and achieved the client’s target of mining some 84-million tonnes of waste in the 2014 financial year.

Compromising mining and construction contractor Leighton Botswana, Basil Read Mining Botswana and engineering and contracting firm Bothakga Burrow Botswana, the MMJV was undertaking the Cut 8 Phase 2 contract mining services at the Debswana diamond mine in Jwaneng, Botswana.

Additional drilling capacity was provided to MMJV through a six-month plant hire agreement. 

Meanwhile, Tschudi copper mine operater Weatherly International had requested Basil Read to accelerate the mining rate of the Namibia-based mine by 40% and negotiations were ongoing.

HOUSING DEVELOPMENTS
“While the result are very bad, I think it is important to note that, within our company, we have several examples of well-run projects,” Nicolau said, adding that Basil Read Developments would continue to focus on large-scale mixed-income integrated housing developments.

These projects included Savanna City, which had been designed to offer more than 18 000 housing opportunities, and  Malibongwe Ridge, an extension to Cosmo City, which would offer more than 5 000 opportunities. 

“These project use an integrated city model that brings subsidised housing, affordable housing and middle-class housing, along with community structures such as schools, churches, shopping centres and industrial parks. It becomes a normal community where you don’t need highways and so on,” Nicolau added.

During the year, the division secured sufficient funding from the Gauteng provincial government to start installing services for the first phase of Savanna City. Similarly, bulk funding was secured to progress work at Malibongwe Ridge where 486 fully subsidised units were at an advanced stage of completion. 

Savanna City and Malibongwe Ridge were expected to be completed over the next ten and five years respectively. Servicing of Phase 1 of Savanna was complete, while R164-million in funding for Phase 2 bulk and link engineering services had been secured from the provincial government for the next two financial years.

At Malibongwe Ridge, bulk funding had been secured for the water pipeline and link funding for roads and stormwater infrastructure. The fully subsidised housing units were 80% complete and would be handed over to beneficiaries in June.

The Development division also continued to generate revenue from the sale of stands in the Cosmo City Industrial Park and Klipriver Business Park, where sales have been steady. 

“Prospects for the division’s involvement in top-structure development of affordable housing projects remain good, especially where it is already the master developer such as at Malibongwe Ridge and Savanna City,” it noted.

Although demand for affordable housing remained strong, supported by substantial government investment, rising interest rates, continued high unemployment and limited household incomes posed challenges for the year ahead, the company said.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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