Building & Housing
This is the largest division
generating about a third of group
revenue. It’s medium- to long-term
prospects don’t look exciting at
all. While its secured contracting
order book of R6.1bn (2014:
R6.8bn) is largely healthy, margins
are expected to remain tight – in
the lower end of management’s
two- to three-year target range
of 2% to 4%. The one-year order
book is on R4.4bn, 5% lower than
the previous year and at 89% of
last year’s revenue for the division.
Management says much of the
secured work for this division is
SA-based, which hints at the kind
of margins to expect. Building and
housing is a hotly contested sector.
Civil engineering
We expect this division, which
took a big hit due to poor project
planning and execution in the past
year, to remain under pressure. It
reported a core operating loss of
R96m in the past year largely due
to massive losses incurred at the
Eastern Cape power project. While
management has put in corrective
measures, we expect spill-over
cost pressures until the project
is completed.
In the meantime management
has revised the operating margin
guidance downwards to the 2%4% range from the previous range
of 3%-5%. Its order book is 35%
bulkier at R3.3bn (2014: R2.4bn) but
a significant portion of that relates
to the Kpone project, where real
profit is likely to be realised towards
contract completion in 2017 or
2018. The Kpone project, worth
about $410m, is a Ghanaian designand-build power plant contract
secured in December 2014.
Projects and Energy
The combined order book for these
two divisions is up 45% to about
R4.8bn (2014: R3.3bn) but, similar
to the other divisions, margins are
likely to remain paper thin. Much
of the secured work is not in the
higher-margin mining and industrial
projects that the divisions used to
pursue, but a substantial portion
relates to the Kpone project.
Investment and concessions
This is more likely to be the
shining star for the group.
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ISSUE 6 – SEPTEMBER 2015
Prospects are largely promising
but won’t be enough to offset the
subdued outlook for the other
bigger divisions. However, with
the division’s operating margin
expected to remain elevated at
around 20%, it will provide positive
margin support for the group. As
at 30 June, the reported three-year
order book stood at R2.1bn but only
about R1bn is likely to be realised
in the current year. The good thing
though is that much of the division’s
revenue is annuity income.
Overall
The overall order book for the
group including operations and
maintenance comes to R18.8bn,
10% up on the previous year. This is
solid given the intensely contested
environment but the spectre of
margins being in the lower end of
the 2%-4% range remains our major
worry as projects can easily slip
into losses.
Also overhanging this unpleasant
picture are potential financial
and non-financial damages from
possible Competition Tribunal
convictions on the collusion cases.
While two of the four cases in
which the group was implicated
were dropped, the other two
were referred to the Competition
Tribunal. The costs of a conviction
may not be limited to a financial
penalty which the commission has
recommended at 10% of annual
revenue, but might also give
impetus to civil claims.
On the positive side we like Group
Five’s efforts to diversify its revenue
stream, which has resulted in good
penetration in the energy, oil & gas
and transport sectors. The group
stands ready to capture work on
the SA nuclear build project if it
materialises. Its increased focus
on investments and concessions is
also seeing an increase in annuity
income which n