There is little opportunity for JSE-listed infrastructure company Group Five to grow shareholder value in the domestic market, says CEO Mike Upton.
He says value can still be found in the private sector, in the renewable and industrial power sector and 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 adds that government also has to face “the reality of the fiscus” and the fact that “it’s capacity to implement large projects is not good”.
Unease between government and the construction industry is also pushing Group Five to look for work outside South Africa, he notes, 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, was granted leniency by the commission on all 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 have to be settled, with a provision made for a possible fine, says Group Five CFO Cristina Teixeira.
Upton says all these factors mean that Group Five either has to cut its cloth to the local market or seek more international opportunities.
Africa has 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, says Upton.
Around 64% of the company’s current secured total order book of R17.15-billion is in South Africa.
A R4-billion contract for an African private-sector gas turbine power plant, which Upton hopes to sign soon, could bring this down to 51%.
The 50% international target has prompted Group Five to restructure its civil engineering unit.
This does not signal job losses, says Upton. In fact, the unit is probably short on capacity.
“We need to reorganise civils – it has to become more agile, more able to work outside South Africa.”
Group Five has learnt a few hard lessons in the Democratic Republic of Congo (DRC) in the past financial year, ended June 30, through a lossmaking mining contract, now completed, says 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 project? Then the answer was ‘no’, now it is ‘yes’,” says Upton.
He believes it will 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 has also restructured its board in an effort to better facilitate its African expansion and large project ambitions.
Justin Chinyanta, a Zambian national with pan-African business experience has been added as a nonexecutive, as has Willem Louw, a former Sasol senior executive with large project execution experience; as well as 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 adds that he is approaching Group Five’s executive retirement age of 60, after eight years at the helm.
The board has, therefore, initiated a process to appoint his successor, and expects 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%, compared with the original group target of between 4% and 6%. This has since been adjusted to between 3% and 5%.
“This is the reality of the market,” says Upton. “[The year] 2014 was much harder than what was anticipated 12 months ago.”
He says margin pressure is likely to remain around the current levels for the first half of the 2015 financial year.