Group Five to sell majority stake in SA construction business as losses mount

12th April 2018

By: Irma Venter

Creamer Media Senior Deputy Editor

     

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Group Five will soon become a minority shareholder in its construction business in South Africa, says CEO Themba Mosai.

Speaking on Thursday in Johannesburg at the company’s interim results, he noted that Group Five targeted the sale of 51% of its South African construction business to an empowered shareholder, as part of the Voluntary Rebuilding Programme (VRP).

He said the VRP stipulated only a 40% sale to an empowered buyer, but that “markets and clients” were increasingly demanding to do business with companies that were 51% black-owned.

Mosai said Group Five had already appointed a corporate adviser, with the process to enable the sale under way.

He said the sale had been delayed as Group Five first “had to clean up the business”. He added that he could offer no time frame for the sale.

The VRP agreement was signed between government and seven large construction companies last year, following all the companies admitting in settlement agreements with the Competition Commission to engaging in collusion and price fixing.

The transformation commitments of the companies in terms of the VRP agreement involved each of them either mentoring up to three emerging black-owned contractors so they were able to sustain a cumulative annual revenue equal to at least 25% of the mentor companies’ annual revenue from civil engineering and building works delivered in South Africa by 2024, or disposing of at least 40% of their South African civil engineering and general building construction businesses to an enterprise that was more than 51% black-owned, managed and controlled.

In terms of the agreement, the parties would also collectively make a contribution of R1.5-billion over 12 years to a fund established for social and economic development, with a direct bearing on the construction sector.

Group Five on Thursday reported a R775-million loss for the six months ended December 31, compared with a R339-million loss in the comparable period in 2016.

This number included a R157-million loss in the South African construction business, a R51-million loss in the rest of Africa construction business and R649-million loss at the Kpone contract in Ghana.

Mosai expected the Kpone contract to be completed in June.

Group Five’s operations and maintenance order book reached R5.7-billion on December 31, compared with R6.1-billion in the comparable period.

The total contracting order book was at R7.7-billion, down from R9.6-billion.

Cash Crunch
Group Five had only R140-million in free cash available at the end of December, said CFO Cristina Texeira.

The R475-million outflow seen in the six-month period was owing to a reduction in the South African order book, debt repayments and demands on the Kpone project, among other factors.

Texeira described R140-million as “marginal and insufficient”. In an effort to improve liquidity, the group was seeking bridging finance, with a funding consortium indicating that it would be willing to provide up to R650-million.

A potential rights offer might also be on the cards.

Steps taken to reduce costs within the company include rightsizing the business, with the closure of the roads and earthworks, plant, low-cost housing and nuclear businesses.

Headcount has been reduced by 420 people in the last nine months.

Group Five will also move from its Waterfall premises, in Midrand.

Texeira said Group Five’s shrunken construction and engineering, procurement and construction businesses should reach break-even by June 2019.

The focus was on quality work with strong margins, mainly in the private sector.

New Structure
Going forward, Group Five would “drastically reduce” its construction business in South Africa, said Mosai. The focus would be on building and housing, as well as small, niche civil engineering projects.

The construction business in Africa would only target structural, mechanical, electrical instrumentation and piping work, where Group Five believed there existed better margins and less competition.

This move forms part of a new structure that will see the company focus on four business areas, namely developments and investments; turnkey project solutions; operations and maintenance and construction.

“The South African construction business is in trouble, owing to the market,” said Mosai. “Civil engineering is in trouble in the country.”

Revenue in Group Five’s South African construction business reached R5.3-billion in the six months ended December 31, 2013, falling to R3.1-billion in the period under review. Core operating profit was R154-million, compared with a R208-million loss.

“We looked at the markets where we performed and looked for pockets of excellence, extracting those businesses,” noted Mosai.

“We believe that our revised strategy will position the firm for a more successful future.”

 

 

Edited by Creamer Media Reporter

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