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Group Five looks to Africa as lack of big projects, distrust remain

Mike Upton

Mike Upton

Photo by Duane Daws

13th August 2014

By: Irma Venter

Creamer Media Senior Deputy Editor

  

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There was little opportunity for JSE-listed infrastructure company Group Five to grow shareholder value in the domestic market, said CEO Mike Upton on Wednesday.

Speaking to Engineering News Online at the group’s annual results function, he said value could still be found in the private sector, in the renewable and industrial power sector, as well as in some public sector pockets, such as water, healthcare and transport.

“It’s not all broken, but those big theme projects of the National Development Plan and the Presidential Infrastructure Coordinating Commission are not coming through.”

Upton added that government also had to face “the reality of the fiscus” and the fact that “it’s capacity to implement large projects was not good”.

Unease between government and the construction industry was also pushing Group Five to look for work outside South Africa, he noted, with government’s trust in the industry not yet restored following the Competition Commission investigation into collusion in the sector.

The commission last year imposed R1.46-billion in penalties on 15 companies in the construction industry for collusive tendering related to projects concluded between 2006 and 2011.

Group Five, as a whistleblower on these collusive practices, had been granted leniency by the commission on all of its submissions.

However, the group received notice from the commission that it intended to fine the group for infringements on four projects in which it had been implicated, and for which no leniency had been granted.

These four matters still had to be settled, with a provision made for a possible fine, said Group Five CFO Cristina Teixeira.

Upton said all of these factors meant that Group Five either had to cut its cloth to the local market, or seek more international opportunities.

Africa had proved largely lucrative to date, with higher margins, as well as greater risk.

Group Five should use South Africa as its base, but with more than 50% of its work located outside the country, said Upton.

Around 64% of the company’s current secured total order book of R17.15-billion was in South Africa.

A R4-billion contract for an African private sector gas turbine power plant, which Upton hoped to sign soon, could bring this down to 51%.

The 50% international target had prompted Group Five to restructure its civil engineering unit.

This did not signal job losses, said Upton. In fact, the unit was probably short on capacity.

“We need to reorganise civils, it has to become more agile, more able to work outside South Africa.”

Group Five had learnt a few hard lessons in the Democratic Republic of the Congo (DRC) in the past financial year, ended June 30, by means of a loss-making mining contract, now completed, said Upton.

The contract suddenly grew in scope while the three-way joint venture (JV) was on site. The project also faced some technical, logistical and weather-related difficulties.

“Did we have the right organisation to go that far north on a civils projects? Then the answer was no, now it is yes,” said Upton.

He believed it would also be prudent for Group Five to better choose its JV partners should it again tackle such as project.

BOARD STRENGTHENED, UPTON TO RETIRE
Group Five had also restructured its board, in an effort to better facilitate its African expansion and large project ambitions, announced Upton on Wednesday.

Justin Chinyanta, a Zambian national with pan-African business experience had been added as a nonexecutive, as had Willem Louw, a former Sasol senior executive with large project execution experience; Babalwa Ngonyama, an experienced business woman and chartered accountant; Vincent Rague, a Kenyan national experienced in pan-African project finance; and Mark Thompson, the former CFO of the Sappi Group.

Upton added that he was approaching Group Five’s executive retirement age of 60, after eight years at the helm.

The board had, therefore, initiated a process to appoint his successor, and expected to make an announcement in the next few months.

Group Five recorded R15.34-billion in revenue for the financial year ended June 30, up 39% on the previous financial year.

Operating profit was up 23%, to R647-million.

Civil engineering fared the worst of all the business units, operating at a core margin of 1.8%, versus the original group target of between 4% and 6%. This had since been adjusted to between 3% and 5%.

“This is the reality of the market,” said Upton. “2014 was much harder than what was anticipated 12 months ago.”

He noted that margin pressure was likely to remain around the current levels for the first half of the 2015 financial year.

Edited by Creamer Media Reporter

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