Five : announces a pleasing improvement in earnings for the six months to December 2015

Group Five announces a pleasing improvement in earnings for the six months to December 2015

15 February 2016

Group Five today delivered a pleasing improvement in earnings for the first six months of F2016 over the low base of the prior comparable period.

Commenting on the results, Group Five CEO Eric Vemer, said:

'Our improved performance was driven by strong results from the Investments & Concessions cluster which more than offset a continued weak performance from the Engineering & Construction cluster, which delivered operating results below expectation. The Manufacturing cluster delivered a similar result to that of the prior six months against difficult South African markets.

'During the period, we further intensified our focus on improving returns on capital per cluster. The Investments & Concessions cluster is above target and Manufacturing returns are in line with target. As Engineering & Construction is below target we have identified several courses of action to address this under performance. These include an even stronger focus on quality execution of contracts to deliver work to the required standard on time, further reducing operating costs and overhead, optimising capital employed, improved targeting of tenders to secure preferred work at competitive margins and further accelerating efforts into Africa (now 41% of the group contracting order book) to compensate for the weak South African markets.'

Looking forward, Mr Vemer added:

'We have a clear strategy that will deliver sustainable profit and positive economic returns over the longer term, despite challenging market conditions in the shorter term. Corporate restructuring over the last year is delivering results through a more cost-efficient, aligned organisation, focused on profitably and safely delivering an on-time quality product to our clients. Our improved contract loss-making ratio is testament to this.

'The group is making steady progress in its sector-led African expansion strategy, which leverages off the group's established bases in West, Southern and East Africa, with a particular focus on the energy, transport and real estate markets. These markets are active, although the contracts have long gestation periods, and continue to show solid medium to long term prospects.

'An expected ongoing strong contribution from our annuity business of Investments & Concessions and Manufacturing is expected to continue to mitigate against lower Engineering & Construction earnings through challenging markets in the shorter term, with strong group profit growth anticipated as our order book returns to growth in the medium term.'

The group's total secured Engineering & Construction Contracting order book stands at R11,8 billion (June 2015: R14,1 billion and December 2014: R13,3 billion). In addition, the group has R5,8 billion (June 2015: R4,7 billion and December 2014: R4,7 billion) in secured operations and maintenance contracts. Given an ongoing weaker South African market and the long contract development lead times relating to African mega-contract development, uneven order intake and order book growth can be expected to continue over time. The overall group reported order book at December 2015 now stands at R17,6 billion (June 2015: R18,8 billion and December 2014: R18,0 billion).

An improvement in the group's earnings performance is expected for the full year as a result of:

• the enhanced group operating structure
• an improvement in the group's reported Engineering & Construction contract loss-making ratio
• anticipated strong profit performance from Investments & Concessions

YEAR UNDER REVIEW

FINANCIAL OVERVIEW

• Group revenue increased by 5.2% from R6,9* billion to R7,3 billion
• • Mainly as a result of increased revenue from the Investments & Concessions cluster and the Building & Housing and Projects segments within the Engineering & Construction cluster
• The group's core operating profit increased by 46.3% from R215,4* million to R315,1 million
• • Mainly as a result of the stronger fair value gains on service concessions (R110,2 million) and fair value gains on investment property (R43,6 million), over those traditionally reported (H1 F2015: R45,8 million and nil respectively)
  • • The Investment & Concessions core operating profit increased by 117.9%
    • The Manufacturing core operating profit decreased by 33.4%
    • The Engineering & Construction cluster's core operating profit decreased by 13.6%
• The group's overall core operating margin increased from 3.1% in the comparable period to 4.3%. The group's total operating margin increased to 4.0% (H1 F2015: 3.0%)
• Headline earnings per share (HEPS) of 131 cents represents an increase of 20.2%, and fully diluted HEPS (FDHEPS) of 131 cents per share an increase of 21.3%, compared to the HEPS and FDHEPS of 109 cents and 108 cents per share respectively for H1 F2015
• Earnings per share (EPS) of 168 cents and fully diluted EPS (FDEPS) of 168 cents per share represents a 42.4% and 43.6% increase respectively over the 118 cents per share and 117 cents per share for H1 F2015
• • The difference between earnings and headline earnings in the period was mainly as a result of a profit on the fair value adjustment of an investment property, as well as profit on sale of fixed assets
• It is pleasing to note that the group's statement of financial position continues to be sound, with a nil net gearing ratio and an increase in the bank and cash balance to R3,6 billion as at 31 December 2015 (F2015: R3,4 billion and H1 F2015: R3,1 billion)
• The group's cash balance is at a record high. The group generated R214,6 million (H1 F2015: R231,2* million) cash from operations before working capital enhancements of R98,2 million (H1 F2015: R89,2* million). This resulted in a net cash inflow from operating activities of R165,2 million (H1 F2015: R134,4 million)
• A dividend for this period of 42 cents per share (H1 F2015: 30 cents) has been declared

*Restated for the application of IFRS 5 - Non-current assets held for sale and discontinued operations, as a result of the decision to transfer the remaining business within the discontinued cluster of Construction Materials into continuing operations within the Manufacturing cluster.

OPERATIONAL OVERVIEW

Summary

• Restructuring action taken and operational improvements within the Engineering & Construction cluster over the last year have started to deliver results, with a gratifying improvement in the overall reported contract loss-making ratio achieved. However, as construction markets have mostly remained weak, additional reduction in business carrying costs was made, over that originally planned, in line with the declining level of new order intake. The corrective action and related negative operational gearing against a declining order intake, particularly in the Civil Engineering and Projects segments, placed pressure on operating margin delivery within the Engineering & Construction cluster.
• Investments & Concessions enjoyed a very pleasing first half, with good operational results buoyed by strong fair value profit realised on the investment portfolio comprising the group's Eastern European toll road assets. This was as a result of a maturing project portfolio risk profile and the meaningful depreciation of the Rand against the Euro. Additional fair value growth and profit was realised from a South African property asset.
• The Manufacturing cluster experienced challenging markets in all the product areas of, fibre cement and related products, reinforcing steel supply and large-bore steel water pipe. Despite these market pressures, the management team was able to continue driving operational efficiencies to optimise production cost. This resulted in a satisfactory financial performance in line with the second half of the prior financial year, albeit down on the prior comparable reporting period

Engineering & Construction - 85.8% of group revenue (H1 F2015: 85.8%) and 19.0% of group core operating profit (H1 F2015: 32.2%)

• Revenue remained largely unchanged, with a 5% increase from R5,9 billion to R6,2 billion
• Core operating profit decreased by 13.6% from R69,3 million to R59,9 million
• The overall Engineering & Construction core operating profit margin percentage was 1.0% (H1 F2015: 1.2%)
• Over-border work contributed 29% (H1 F2015: 24%) to cluster revenues

Building and Housing

• Revenue increased by 13.4% from R2,3 billion (99% local) to R2,7 billion (100% local)
• The segment reported a 24.9% decrease in core operating profit over the comparable period, from R46,1 million to R34,6 million
• This resulted in the overall core operating margin percentage decreasing from 2.0% to 1.3%

The secured one-year order book stands at R3,6 billion (100% local) (F2015: R4,4 billion and 100% local) (H1 F2015: R4,6 billion and 100% local). The total secured order book stands at R5,0 billion (100% local) (F2015: R6,1 billion and 100% local) (H1 F2015: R5,4 billion and 100% local).

Civil Engineering

• Revenue decreased by 22.4% from R1,6 billion (59% local) to R1,3 billion (68% local)
• Core operations generated a loss of R17,1 million for the six months (H1 F2015: R44,4 million loss)
• • Included within the operating losses during the current period is an amount of R10,4 million incurred in retrenchment and holding costs, in excess of those originally planned, as the group continues to rightsize this segment to match market demands and conditions
  • In addition, the business realised R16,0 million profit on sale of fixed assets. This is included within the segment's reported core margin, in line with the group's policy, but adjusted for the determination of headline earnings

Civil Engineering's secured one-year order book stands at R2,2 billion (54% local) (F2015: R2,1 billion and 58% local) (H1 F2015: R2,0 billion and 56% local) The full order book is at R3,1 billion (49% local) (F2015: R3,3 billion and 53% local) (H1 F2015: R3,1 billion and 49% local).

Projects

• Revenue increased from R930,6 million (36% local) to R1,3 billion (25% local)
• Core operating profit decreased by 58.3% from R55,9 million to R23,3 million
• The coreoperating profit margin percentage decreased to 1.8% (H1 F2015: 6.0%), largely due to an increase in the portion of the current order book being executed in South Africa and in neighbouring regions, which traditionally delivers lower margins than those in the rest of Africa. Labour unrest, especially at a KwaZulu-Natal project, further impacted segment performance

The secured one-year order book stands at R1,5 billion (22% local) (F2015: R2,0 billion and 23% local) (H1 F2015: R2,0 billion and 17% local) The full secured order book stands at R2,1 billion (15% local) (F2015: R2,8 billion and 18% local) (H1 F2015: R2,8 billion and 12% local).

Energy

• Revenue remained largely unchanged, with a 2.4% decrease from R1,048 billion (88% local) to R1,023 billion (56% local)
• Core operating profit increased by 62.3% from R11,8 million to R19,1 million
• This resulted in a core operating profit margin of 1.9% (H1 F2015: 1.1%)
• • Included within these trading results are the costs related to investment in future opportunities and capacity building for nuclear readiness of R13,1 million. The core operating margin before these investment costs was thus 3.1%

Construction of the Kpone independent power project located at Tema, near Accra (Ghana), is proceeding in line with plan. This is currently in its early stages and targeted for completion at the end of 2017. The Energy, Projects and Civil Engineering segments are jointly responsible for the execution of this contract.

The secured one-year order book stands at R1,1 billion (9% local) (F2015: R1,3 billion and 21% local) (H1 F2015: R1,3 billion and 22% local). The full secured order book stands at R1,6 billion (6% local) (F2015: R1,9 billion and 14% local) (H1 F2015: R2,0 billion and 14% local).

Investments and Concessions - 8.1% (H1 F2015: 6.5%) of core group revenue and 72.2% (H1 F2015: 48.5%) of core operating profit

• Revenue, which consists primarily of fees for the operation and maintenance of toll roads, increased by 29.2% from R453,8 million to R586,4 million
• The core operating profit margin increased from 23.0% to 38.8%, with an increase in core operating profit of 117.9% to R227,5 million (H1 F2015: R104,4 million)
• • The operating profit includes upward fair value adjustments on investment property held of R43,6 million and investment in service concessions of R110,2 million, totalling R153,8 million (H1 F2015: R45,7 million)

Manufacturing - 6.1% (H1 F2015: 7.6%*) of core group revenue and 8.8%
(H1 F2015: 19.4%*) of core operating profit

• Revenue decreased by 15.7% to R446,1 million (H1 F2015: R529,3* million)
• Reported core operating profit for the period decreased by 33.4% to R27,8 million, from H1 F2015 of R41,7* million
• This resulted in a core operating margin of 6.2% (H1 F2015: 7.9%*)

*Restated for the application of IFRS 5 - Non-current assets held for sale and discontinued operations, as a result of the decision to transfer the remaining business within the discontinued cluster of Construction Materials into continuing operations within the Manufacturing cluster.

Group Five Ltd. issued this content on 15 February 2016 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 15 February 2016 13:50:21 UTC

Original Document: http://www.groupfive.co.za/news_article.php?articleID=3131