The impact of legacy lossmaking contracts remain reflected in the results of civil engineering and construction group Esor, shrinking revenue by 9.1% to R1.45-billion for the year ended February 28, 2015.

The group’s financial perfomance had been further impacted by a R29.7-million impairment of goodwill and the fair value write-down of the contingent consideration from the R35.4-million disposal of the geotechnical business and the operating loss of R48.3-million reported in the civils division.

The company had since, completed, handed over and resolved the “problem” contracts as a result of its “back to basics” approach, which saw the group restructured into a single construction unit with six product areas.

Despite the impact of impairments and lossmaking contracts, Esor managed to improve earnings by 39.9% over the period, but nonetheless closed out the year with an overall loss of R99.9-million.

This translated to a headline loss a share of 18.8c compared with a headline loss of 11.3c and a headline loss from continuing operations of 24.4c.

CIVILS DIVISION
Reviewing its operations, the group said Esor Civils – the first of its core divisions prior to the the streamlining of the company in March – remained negatively impacted by macroeconomic conditions.

“Margins were tight, with contracts which were tendered for in a tough environment now being executed in an even more challenging landscape,” CEO Wessel van Zyl said in a results statement on Thursday.

Esor’s various contracts at the Kusile power station, in Mpumulanga, accounted for 60% of Esor Civils' revenue and one-third of group revenue.

“The division, therefore, focused on entrenching its strong relationship with [energy utility] Eskom, which has proven a reliable debtor,” he noted.

Underground facilities works and the general services piping contracts at Kusile were currently under way, while the crushing  and bulk earthworks contracts had been completed and claims finalised.

Historical claims on the terrace underground facilities contract, related to delays and disruptions, were finalised in October and the settlement received in November.

Van Zyl added that Esor Civils had successfully completed the Bakwena N4 road  contract – its most challenging lossmaking contract – in the second half of the year.

“Now handed over, the N4 contract incurred a further R56-million loss resulting from late completion, partly owing to late changes to the scope of works and the impact of the labour unrest at [the] Marikana mine,” he said.

The division, meanwhile, successfully targeted refurbishment projects in the year, securing a contract for the conversion of a Johannesburg inner-city office block into residences.

Other refurbishment contracts currently under way included the upgrade of the OR Tambo International Airport duty free area for Airports Company South Africa and the upgrade of Walter Sisulu Square for the Johannesburg Development Agency.

In addition, Esor grew its footprint in the KwaZulu-Natal government housing market, securing two projects totalling 1 500 units and would continue to pursue work in the sizable low-cost housing market. 

PIPELINES BUSINESS
Van Zyl outlined that Esor Pipelines had a “solid, substantially full” order book notwithstanding some project cancellations and delays in the year, and continued to deliver a good performance in an increasingly competitive market.

The group successfully completed a number of key pipeline projects over the year and had been awarded work by eThekwini at the Western and Northern Aqueducts, which were progressing well. 

On the pipejacking front, Esor was awarded substantial work in the year comprising various long-term projects such as the Western and Northern  Aqueducts and new awards such as the Malkerns Canal project, in Swaziland, the Lion Park and Tshelimnyama pipelines contracts, in KwaZulu-Natal.

Esor, meanwhile, continued to drive cross-border expansion and had since achieved success in Swaziland.

“However, procuring work in other Southern African Development Community countries is proving tougher, impacting on time and costs,” said Van Zyl.

DEVELOPMENTS SEGMENT
The Esor Developments business had, meanwhile, progressed well over the 12 months, with five developments in various phases of planning and execution.

Over the year, the group concluded a joint venture (JV) agreement with black-empowered residential project developer Calgro M3 regarding the Diepsloot East integrated residential development project, bringing Esor’s share in the project to R2-billion.

Under the terms of the deal, Calgro M3 would be responsible for project development and management, while Esor would retain the right of first refusal for the installation of all engineering services and construction of 50% of the top structures.

Esor's new prospective development project in the Khayelitsha township, in the Western Cape, meant that the order book value remained steady, despite a drop in revenue in terms of the Calgro M3 JV. 

Looking ahead, delays in spending the allocated budget on the Diepsloot project would impact revenue in the 2016 financial year. 

Looking to overall capital expenditure for the period, Esor incurred of R20.5-million during the year, primarily to expand the capacity of the pipelines division, which had resulted in a relatively new and well-maintained fleet and well-equipped workshops.

PROSPECTS
The Esor board, meanwhile, expected the group to continue to recover in the year ahead.

“The streamlined group is agile and nimble to go to where the work is and structured for profitability, with clear focus areas and improved synergies between disciplines. 

“Sanitation has been earmarked as an area of future opportunity following the Water and Sanitation Minister’s stated commitment to improved access and better infrastructure, particularly in rural areas,” said the group.

It would further continue to focus on reducing debt and improving cash flow. 

Esor did not declare a dividend for the period.