Three lossmaking contracts sharply eroded profits at JSE-listed civils and construction group Esorfranki for the six months ended August 31. The company reported a 38.5% increase in revenue, compared with the same period last year, to R1-billion, but saw profit for the period plummet 95.3% to R2.2-million.

The order book held steady at R2.2-billion.

The contracts largely responsible for the decline were housed within the civils division.

The Hwelereng roads project, in Limpopo, was a victim of central government intervention in the poorly managed province, which halted the project temporarily, as well as insufficient reporting within the company, notes CEO Bernie Krone.

Esorfranki faced stringent safety regulations at Anglo Thermal Coal’s Kriel Block 7 main civils, boxwall and highwall project, which means it was “there twice as long [as it] should have been”.

Work on the N4 Mooinooi Bakwena project experienced difficulty as it is in the Marikana area, and was affected by the labour battle that had been raging on the mines there since last year, notes Krone.

“We are not happy making losses on contracts. Going forward, we are going to avoid lossmaking projects like the plague.”

In order to do this, Esorfranki has put in place numerous interventions, such as overhauling the management structure in the civils division and reassessing the contract portfolio.

Around 230 jobs have been cut.

Asked about the recent trend of lossmaking contracts prevalent at a number of South African contractors, and whether local construction companies are able to price projects correctly, Krone says pricing is not the problem, but rather productivity.

“You can’t reach the productivity figures you tendered on. The policy of taking on local labour [from the community] is giving us headaches. The workers do not want the contract to end, so they drag it out, as this will probably be the only job they will have for a very long time.”

Krone says these external factors, as well as intense competition in the marketplace, are hindrances to successful project execution.

Once a geotechnical specialist, Esorfranki sold its geotechnical business to the global Keller group, after the reporting period of August 31, for R500-million, with a contingent consideration of R150-million over three years.

The geotechnical business setion made up 36% of the company’s business.

While the deal produced much-needed cash for Esorfranki, Krone says he knows it will be asked why management agreed to this, especially if Keller manages to push the division to new heights in Africa.

He notes, though, that Esorfranki would have felt the effect of Keller entering the African market as a competitor, had it not sold the business to the global group.

“In essence, we sold our lunch to the biggest kid on the block before he took it anyway.”

Esorfranki will now be known as Esor, with the Keller business in Africa known as Franki Africa.

In response to whether Esor should remain a listed company, with its market cap now at roughly R300-million, Krone says the company does not find it a “huge cost” to be listed, or “a hassle”.

“We need to make money and pay dividends.”

Krone believes Esor can grow its expanding pipeline and fledgling housing businesses. The consolidation of its civils business should also bring relief.

“We got carried away with how much work civils can do, but we have rationalised [this business] now.”