Infrastructure build as elusive as ever
group lost R224m on the contract
largely due to estimating errors,
delays in project implementation,
high management turnover and
insufficient execution knowledge.
The group also retrenched about
2 400 employees, more than half
of its staff complement in the
civil engineering unit, which also
weighed on the results.
Group Five desperately
needs big projects
While shares for most South African
heavy construction companies
look like give-aways, trading at
massive discounts to what they
used to not so long ago, the woes
that dragged them into this hole
remain. The sector is still plagued
by legacy projects, loss-making
contracts and a lack of major
infrastructure investment.
The construction industry is in dire
need of a boost. Unfortunately
with the economy creaking along a
sub-3% growth path and hobbled
by high sovereign debt, big
infrastructure projects are looking
more and more unlikely.
Group Five’s profit metrics for the
year to end-June all head in the
wrong direction.
Management cited operational
challenges at the Eastern Cape
power project as one of the major
causes of this poor showing. The
Due to contract losses within
the civil engineering segment,
restructuring costs and a lower rate
of trade in a number of segments,
revenue was 10% lower at R13.9bn
(2014: R15.4bn). Headline earnings
plunged 50% to 205c (2014: 407c)
as the operating margin, which had
started to recover over the past
few years, retreated to 2.6% from
4.2% previously.
Prospects and valuation
Group Five’s operations are
grouped into three clusters:
engineering & construction;
investment & concessions;
and manufacturing. We took
a look at the prospects of the
five main construction-related
divisions below.
Group Five’s shares sport a lowly
forward price:earnings multiple of
7.6 and a dividend yield of 2.5%,
backed by a net asset value that
is 15% higher than the current
market price. If you are a long-term
investor these metrics might look
seductive but buying in is more like
taking a bet on the implementation
of the government’s
overhyped multibillion-rand
infrastructure programme.
For retail investors with an
investment horizon of three
years or less, it doesn’t seem like
the right moment to buy in. But
if you already hold its shares,
our discounted cash-flow model
suggests it might be wise to hang
on to them as they seem to have
bottomed out.
ISSUE 6 – SEPTEMBER 2015
25