Construction company Group Five’s operating profit dropped 43% for the year ended June 30, with the sharp decline largely the result of a R224-million loss at a power project in the Eastern Cape, as well as the weak performance of the company’s Engineering and Construction (E&C) business.

“It has been a very disappointing 2015,” says CEO Eric Vemer.

Revenue for the year dropped 10%, to R13.87-billion, compared with the previous financial year. Operating profit dipped to R366-million. Net profit for the year declined by 44% to R224-million.

Vemer says the E&C business struggled in a challenging market, while poor estimating, an extended contract negotiation period, the delayed start to construction, a compact construction site, labour unrest and low productivity all played a role in the Eastern Cape loss.

Leadership at the E&C division has since been restructured, while there has also been a focus on standardising procedures across all business segments and improving the accuracy of determining the costs to complete a project.

Other remedial action includes cutting 2 600 jobs at the civil engineering unit, leaving the current workforce at fewer than 2 000 people, says Vemer. Just more than 230 of the jobs cut were permanent positions, with the remainder contract employment positions.

“We anticipate improved delivery [from this unit]. Yes, South Africa is a challenging market, but it is our home market, so we have to make it work.”

Retrenchment costs stood at R38-million for the past financial year.

The “very slow” South African civils market is unlikely to tick upwards in the next 18 to 24 months, leading to the decision to reduce Group Five’s civils workforce, notes Vemer.

Despite pockets of activity, there are “no big public-sector projects coming to the market”.

Even with the civil engineering unit at less than half the size it was last year, it still has capacity for additional work in its order book, adds Vemer.

The E&C business, which includes the building and housing, civil engineering, projects and energy units, recorded a 12% decline in revenue for the financial year to R11.8-billion, with core operating profit down from last year’s R371-million to R44-million.

The civil engineering unit recorded a R96-million loss.

The Investments & Concessions business provided some shine to Group Five’s financial results, increasing revenue by 10% to R995-million, and growing core operating profit by 20% to R237-million.

Revenue at the Manufacturing business remained flat at R1-billion, with core operating profit down 17% to R68-million.

Group Five’s operations and maintenance order book also remained flat, compared with last year, at R4.7-billion. However, the group’s contracting order book improved 13% year-on-year to R14.1-billion.

Around 61% of the contracting order book was in South Africa, and 39% cross-border. Of the 61%, 33% was in the public sector and 28% in the private sector.

All the cross-border work is in the private sector.

Looking ahead, Vemer expects Group Five’s earnings to improve in the new financial year, despite a continued margin squeeze.

Two of the four cases involving Group Five at the Competition Commission have been dropped owing to insufficient evidence, says CFO Cristina Teixeira.

The four cases formed part of a broad investigation into collusion in the South African construction industry.

Group Five declined to settle these cases with the commission in a fast-track settlement process following the investigation, owing to what the company says are “factual discrepancies and a lack of evidence”.

As a whisteblower, however, Group Five was granted leniency for the more than 20 projects it declared to the commission.

Group Five is now awaiting the Competition Tribunal’s verdict on the outstanding two cases.

It is important to finalise all construction-related cases pending at the commission, says Vemer, in order for government and the industry to “move on” and reach the objectives of the National Development Plan.