JSE civils and construction group, Esorfranki, grew revenue to R1.0 billion for the six months to August 2013 (“the period”), with star performer Pipelines doubling revenue and increasing operating profit three-fold. Despite a challenging first half of the year the group upheld its revenue levels and maintained a healthy order book of R2,2 billion (excluding geotechnical work.) Post year-end Esorfranki has sold its geotechnical division to Keller Group plc ("Keller") for R500 million cash consideration, which will enable the group to settle debt obligations and pay shareholders a special dividend. 

Revenue growth of 38,5% generated earnings (EBITDA) of R28 million, down on  R80.4 million at August 2012. CEO Bernie Krone explains that profitability was hard hit by three problem contracts in the Civils division.  He adds that these will conclude shortly and all losses have been fully provided for.  “Further, contracting practices have been effectively revised to prevent a recurrence of contract losses.”

Headline earnings per share of 0,01 cents compared to 7,8 cents in the comparative period. Net asset value per share was up to 291.7 cents from 267,9 cents. During the period the group spent R26,8 million capex on improving operational efficiencies and capacity to facilitate new work, now in hand. In line with policy no interim dividend has been declared, but the board has approved a special gross dividend to shareholders of 38 cents a share, totalling R150 million, on conclusion of the sale of the geotechnical division to Keller.

Krone describes the period as one of mixed fortunes, with solid performances across most of the group tempered by the problem contracts in the Civils division. “Losses on the Kriel main civils contract, a road contract for Roads Agency Limpopo and the Bakwena N4 toll road considerably impacted profits,” he explains.  “Further, the division was affected by internal labour unrest and strikes at some of its sites.”  This resulted in a loss before tax of R31.6 million compared to a profit before tax of R28.7 million in the comparative period, off 14% higher revenue of R682 million.

Krone is confident that the drastic overhaul measures implemented have positioned Civils to overcome these setbacks.  “New management have been appointed, who have revitalised the employee culture and revised former contracting practices for improved controls,” he says.  The operation has been restructured and rightsized and new processes are in place to focus on the bottom line.  Further, existing contracts at Kusile and additions to these, totalling R1.1 billion, have reinforced its order book. 

“Pipeline’s excellent performance demonstrates that it has moved on from the difficult execution of the BG3 contract and losing the previously awarded Western Aqueduct contract.  The division has a healthy, quality order book and satisfying profits,” he says. Operating profit of R31 million was up 198% from R10,4 million last year. The order book was boosted after the end of the period by the R156 million Northern Aqueduct project and contracts for eThekwini to upgrade the sanitation at rural schools and informal settlements.  Geographically Pipelines is making good inroads with a forceful presence in KwaZulu-Natal and its first project in Africa heading for completion.

Krone is also pleased with the progress of Esorfranki’s new housing project venture, which is proving a good feeder into Civils.  “The fledgling Esorfranki Developments has secured a five –year pipeline of +R4 billion including large-scale projects in Orchards, Diepsloot East, Soshanguve and Uitvlugt.”  The group is targeting low cost and mixed use housing projects as well as housing from government’s ‘breaking new ground’ policy, and all corresponding infrastructure work.

He says disposing of Esorfranki’s geotechnical operations makes good commercial sense, pointing to their flat revenue and market share over recent years, balanced by the potential of a cash injection to bolster the group’s foothold given the good growth prospects of its remaining operations.   “While activities in Africa have been more upbeat for the division, the massive scale and scope of Keller’s operations, would have made it difficult to continue competing in Africa once they entered the continent.  Put simply, we sold our lunch to the big kid on the block before he took it from us anyway,” says Krone. 

While times remain tough he says there is an uptick in tender activity in both the private and government sectors, which bodes well for the group. Krone concludes: “A more streamlined and well managed Civils is positioned to capitalise on future opportunities, while Pipelines is now firmly on its planned growth trajectory.  Supported by Esorfranki Developments which is progressing nicely, we have a solid group platform to grow profitably even in challenging conditions.”

Esorfranki shares closed yesterday at R1.18.