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Aug 13, 2012

Group Five exits Middle East, targets Africa as it records R230m loss

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Group Five CEO Mike Upton discusses his company's position in the civil engineering market. Camerawork: Nicholas Boyd. Editing: Darlene Creamer. Recorded: 13.08.12
Johannesburg|Tshwane|Eskom|Renewable Energy|Africa|India|South Africa|Transport|Eric Vemer|Mike Upton|Middle East
johannesburg|tshwane|eskom|renewable-energy|africa|india|south-africa|transport-industry-term|eric-vemer|mike-upton|middle-east
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A “bittersweet year” was how Group Five CEO Mike Upton described the 2012 financial year on Monday as he dissected the company’s annual results in Johannesburg.

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 continuing 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%, said 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.”

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

Africa had seen strong growth in the resources and transport sectors, added Upton. The group had 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 believed there was a strong market for the building and operating of assets in Africa, especially in the transport market.

He added that Group Five had pretty much wrapped up work on the Middle East for the foreseeable future, with one active contract remaining.

“We want to drive our Africa plan,” he noted, 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 was outside South Africa, with 99% of this in Africa, said Upton.

In the building and housing business, 5% of projects were 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, said Upton.

A new category of order book for Group Five, presented on Monday, was a multiyear operations and maintenance order book, which stood at R4.85-billion for the year ended June 30.

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

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

Group Five currently employed 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, was not delivering results quite as quickly as one would hope, indicated Group Five on Monday.

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

Through the REIPPP, the Department of Energy aimed 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 the REIPPP would be confirmed soon, despite the delay to finalise the 28 window-one projects.

Upton told Engineering News Online that the REIPPP process appeared 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 was also unique in terms of technology, structure and funding, added Upton.

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

The PPP process was facing a similar complexity delay, noted head of Group Five’s investments and concessions division, Eric Vemer.

Group Five was the preferred bidder to provide serviced head quarters 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,” noted Vemer.

While the parties were “best aligned” on the DRDLR project, achieving the same on the City of Tshwane project was proving a difficult task, he added.

Edited by: Creamer Media Reporter
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