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Aug 31, 2012

Group Five keen to accelerate African expansion beyond civils

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Construction|Engineering|Tshwane|Africa|Civils|Eskom|Housing|PROJECT|Projects|Renewable Energy|Renewable-Energy|Resources|Africa|India|South Africa|Building|Energy|Maintenance|Mining|Power Generation|Power-generation|Real Estate Sector|Service|Transport|Eric Vemer|Mike Upton|Power|Operations|Middle East
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A“bittersweet year” is how Group Five CEO Mike Upton describes the 2012 financial year, which ended June 30, for the JSE-listed company.

It was a year that saw the company attempt to wrap up legacy projects in the Middle East and India, as well as close down a loss-making construction materials division.

When balancing out profit from conti- nuing operations at R223-million and loss from discontinued operations, such as construction materials, at R453-million, the JSE-listed construction group reported a net loss of R230-million for the year, following on from a loss of R159-million in the 2011 financial year.

Recording revenue of R8.78-billion for the year, Group Five’s operating margin dropped from 6.9% in the 2011 financial year, to 3.8% in 2012.

The civil engineering business, part of the construction division, took a heavy beating, at a –1.1% margin. However, should the troubled Middle East projects be stripped from this business’ results, the margin was 5.6%, says Upton, “well in line” with the group’s target of between 4% and 6%.

“The underlying business in South Africa and Africa is very healthy.”

Possibility of Improvement

Looking at civil engineering prospects in South Africa, Upton says despite tough conditions remaining, there exists the possibility of improvement. He says tender activity has picked up, but that “pricing is still tight”.

Africa has seen strong growth in the resources and transport sectors, adds Upton. The group also secured 13 new mining construction contracts on the continent in the 2012 financial year, with one power plant contract in progress, and one to start in the 2013 financial year.

Upton believes there is a strong market for the building and operating of assets in Africa, especially in the transport market.

He adds that Group Five has pretty much wrapped up work in the Middle East for the foreseeable future, with one active contract remaining.

“We want to drive our Africa plan,” he notes, not only for civils, but also for the rest of the group.

Around 57% of Group Five’s current R4.4-billion civil engineering order book is outside South Africa, with 99% of this in Africa, says Upton.

In the building and housing business, 5% of projects are outside South Africa, with the projects business, also part of the construction division, at 63% over- border activity, with Upton aiming to take this to 75%.

Group Five’s one-year construction order book was at R8.39-billion at the end of the 2012 financial year, which was 117% of its 2012 revenue.

Total order book was at R11.3-billion, with 62% of this in South Africa, and the remaining work spread across Africa. Around 23% of the order book was in the real estate sector and 24% in the transport market.

At 38% of total order book cross-border, up from 30% in June 2011, the aim was to reach 40% soon, says Upton.

A new order book for Group Five is a multiyear operations and maintenance order book, which stood at R4.85-billion for the year ended June 30.

Upton says the group expects to increase this annuity type revenue stream through the addition of power and service accommodation projects.

When considering the 2013 financial year, Upton expects an improved performance from the company.

Group Five currently employs some 10 400 people, down from a peak of 14 000 during the construction boom four years ago.

Patience Required for Renewable Energy, PPP Projects
South Africa’s R100-billion Renewable Energy Independent Power Producer Programme (REIPPP), as well as government’s public-private partnership (PPP) drive, are not delivering results quite as quickly as one would hope, indicates Group Five.

There are still “some frustrations” on South Africa’s PPP and REIPPP projects, especially in terms of the time it is taking, but Group Five is “not negative”, says Upton.

Through the REIPPP, the Department of Energy aims to procure 3 725 MW of capacity, which could be introduced into South Africa’s power generation mix between 2014 and 2016.

The department said in July that the schedule and capacity allocation for the third bid window under REIPPP would be confirmed soon, despite the delay to finalise the 28 window-one projects.

Upton tells Engineering News that the REIPPP process appears to be bogged down by its complex nature, requiring the input of a multitude of stakeholders, such as the Department of Energy, Eskom, Treasury and many others.

Each project is also unique in terms of technology, structure and funding, adds Upton.

“We were told that the first project would be signed in late August.”

The PPP process is facing a similar complexity delay, notes head of Group Five’s investments and concessions divi- sion, Eric Vemer.

Group Five is the preferred bidder to provide serviced headquarters to the City of Tshwane and the Department of Rural Development and Land Reform (DRDLR).

“We have to align the interests of a number of parties,” says Vemer.

While the parties are “best aligned” on the DRDLR project, achieving the same on the Tshwane project was proving a difficult task, he adds.

Edited by: Martin Zhuwakinyu
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