Esorfranki on Thursday reported that three loss-making contracts had sharply eroded profits for the six months ended August 31, at the JSE-listed civils and construction group.

The company reported a 38.5% increase in revenue compared with the same period last year, to R1-billion, but saw profit for the period plummet 95.3%, to R2.2-million.

The order book held steady at R2.2-billion.

The three contracts largely responsible for the decline were housed within the civils division.

The Hwelereng roads project was in Limpopo, and a victim of central government intervention in the poorly managed province, which halted the project temporarily, as well as insufficient reporting within the company, noted CEO Bernie Krone.

Esorfranki faced stringent safety regulations at Anglo Thermal Coal’s Kriel Block 7 main civils, boxwall and highwall project, which meant it was “there twice as long we should have been”.

Work on the N4 Mooinooi Bakwena project experienced difficulty as it was located in the Marikana area, and affected by the labour battle that had been raging on the mines there since last year, noted Krone.

“We are not happy making losses on contracts. Going forward we are going to avoid loss-making projects like the plague.”

In order to do this, Esorfranki had put in place numerous interventions, such as overhauling the management structure in the civils division, and reassessing the contract portfolio.

Around 230 jobs had also been cut.

Asked about the recent trend of loss-making contracts seen at a number of South African contractors, and whether local construction companies were able to price projects correctly, Krone said pricing was not the problem, but rather productivity.

“You can’t reach the productivity figures you tendered on. The policy of taking on local labour [from the community] is giving us headaches. The workers do not want the contract to end, so they drag it out, as this will probably be the only job they will have for a very long time.”

Krone said these external factors, as well as intense competition in the marketplace, were serving as hindrances to successful project execution.

Sale of Geotechnical Business
Once a geotechnical specialist, Esorfranki had sold its geotechnical business to the global Keller group, post the reporting period of August 31, for R500-million, with a contingent consideration of R150-million over three years.

The geotechnical business had made up 36% of its business.

While the deal produced much-needed cash for Esorfranki, Krone said he knew the question of why management agreed to this would be asked, especially if Keller managed to push the division to new heights in Africa.

He noted, though, that Esorfranki would have felt the effect of Keller entering the African market as a competitor, had it not sold the business to the global group.

“In essence we sold our lunch to the biggest kid on the block before he took it anyway.”

Esorfranki would now be known as Esor, with the Keller business in Africa known as Franki Africa.

In answer to the question whether Esor should remain a listed company, with its market cap now at roughly R300-million, Krone said the company did not find it a “huge cost” to be listed, or “a hassle”.

“We need to make money and pay dividends.”

Krone believed Esor could grow its expanding pipeline and fledgeling housing businesses. The consolidation of its civils business should also bring relief.

“We got carried away with how much work civils can do, but we have rationalised [this business] now.”