Group Five Limited : Group Five continues to deliver solid results against challenging markets for the six months to December 2013

Earnings demonstrate an improved performance over the comparable reporting period and were delivered following the corrective action taken in the last two years, specifically with regard to the Construction Materials cluster and the group's Middle East operations

This year marks Group Five's 40 year anniversary as a listed group

Summary

• Order book:  maintained despite weak markets
  • good sector spread
  • geographically diverse, but still value weighted to South Africa
  • significant African traction expected in H2 in power, mining and transport
• Revenue: growth achieved in target sectors
• Profitability: in line with expectations, excluding Civil Engineering
• Cash: pleasing retention of cash balance in tough market
• BBBEE certification:  reaffirmed as Level 2 contributor at 89.5%

Commenting on the results, Group Five CEO Mike Upton said:
"The sentiment in our markets is gradually improving, with South African demand still comparatively weak and the timing of a recovery remaining uncertain. The rest of Africa and Eastern Europe are demonstrating more visible opportunity.
"Despite the hiatus in the South African market, we managed to deliver improved results, with increased revenue, operating profit and earnings. The earnings demonstrate an improved performance over the comparable reporting period and were delivered following the corrective action taken in the last two years, specifically with regard to the Construction Materials cluster and the group's Middle East operations.

"During the period, we continued to implement the conservative approach previously adopted in terms of both the quality of the order book secured and our philosophy towards cash preservation to fund activity which will support future profit growth.  It is thus encouraging to see the order book continuing to be replenished from new strong growth sectors and multi-disciplinary offerings in which the group has built capacity, with a good cash position supporting this strategy."
In terms of the Competition Commission findings of anti-competitive behaviour in the construction sector, Mr Upton said:

"As previously communicated, the group secured conditional leniency from the Commission in terms of the Commission's Corporate Leniency Policy in return for full disclosure of all matters that the group was able to uncover during its internal investigation process. In late June 2013, it came to the group's attention that the Commission is seeking a proposed administrative penalty on four projects in which the group was implicated and for which no leniency was granted. The group did not have sufficient evidence of its collusive involvement upon which to admit liability and could thus not responsibly accede to the penalties and chose not to settle hastily.

"In October 2013 the head of the Competition Commission was replaced. This resulted in a delay in the settlement of the group's matters. Consultations with the acting Commissioner of the Competition Commission resumed, with a common purpose to reach a settlement as soon as possible. In parallel, the group is actively working with and through the industry and representative business bodies and government to rebuild the stature of the industry as a precursor to, and in support of, the national agenda for the much-needed roll out of the infrastructure programmes embodied in government's National Development Plan (NDP)."

Looking forward, Mr Upton said:

"The group's total secured Contracting order book, which represents the Construction and Engineering & Construction order book, stands at R14,0 billion. We also have R4,8 billion in secured operations and maintenance contracts The overall group reported order-book at December 2013 thus stands at R18,8 billion. The value of the group's target opportunity pipeline stands at R174 billion, with R131 billion of this pipeline currently in tender and pre-tender stage.

"We have made good progress against our two year internal fitness programme. The implementation of much of the process and structure changes, together with the efficiency initiatives, has set a more solid base.

"The outlook for the business in the short term is therefore fair to good. The order book is being replenished in line with the group's strategy, with several strong short term prospects in support of African expansion, particularly in power, transport infrastructure and real estate.

YEAR UNDER REVIEW

• Group revenue from continuing operations* increased by 55.7% from R4,9 billion to R7,7 billion, as a result of increased activity in all of the group's businesses.
• Headline earnings (HEPS) of 204 cents per share represents an increase of 40.7% and fully diluted HEPS (FDHEPS) of 201 cents per share an increase of 39.6%, compared to restated** HEPS and FDHEPS of 145 cents** per share and 144 cents** per share respectively for the comparable reporting period
  • Fully diluted headline earnings per share from continuing operations of 202 cents per share represents a 15.4% increase over the restated 175 cents** per share for H1 F2013
• Earnings per share (EPS) of 200 cents per share and fully diluted EPS (FDEPS) of 196 cents per share represents a 50.4% and 48.5% increase respectively over the restated 133 cents** per share and 132 cents** per share for H1 F2013
  • The difference between earnings and headline earnings in the prior year is mainly as a result of an impairment charge of R11,5 million on assets relating to the disposal of the Construction Materials businesses. This is reflected as non-current assets classified as held for sale on the group's statement of financial position
• The group's core operating profit increased by 28.9% from R260,0 million to R335,2 million on the back of all businesses, other than the Civil Engineering segment, performing in line with expectation and most recent guidance provided in November 2013
• However, the weaker results from Civil Engineering reduced the group's overall core operating margin from 5.1% in the prior comparable period to 4.3%. The group's total operating margin also reduced to 4.3% (H1 F2013 restated** 5.2%)
• The group's statement of financial position continues to be sound, with a nil net gearing ratio and a strong increase in bank and cash balances to R3,2 billion (June 2013: R2,9 billion)
• A gross interim dividend of 45 cents per ordinary share (39.59142 cents per ordinary share net of dividend withholding tax and STC credits) was declared (H1 F2013: 32 cents)

The group's underlying businesses - outside of the Civil Engineering segment - performed in line with management expectations and in accordance with the market guidance provided in November 2013. The Civil Engineering segment was affected by a decrease in profit recognition following management's more cautious view on the estimated final completion margin on two contracts, one of which will be completed during F2014.

• Investments and Concessions: Ongoing strong operating performance from Infrastructure Concessions. Fair value upwards adjustments of R28,4 million (H1 F2013: R29,1 million) from the group's investments in its service concessions
• Engineering & Construction: growth in the cluster and improved trading results
• Manufacturing: Robust earnings following management focus on efficiencies
• Construction:
  • Building & Housing: a resilient performance from the segment, delivering their results from a mainly local order book
  • Civil Engineering:
  • margins were negatively impacted by management's more cautious view on the estimated final completion margin on two contracts due to timing delays
    • One completes in F2014
    • Constructive discussions being held with both clients
  • the positive impact of a reduction in the losses and operating costs reported from the Middle East operations was in line with forecast
  • Projects: continued solid performance following strong activity in African mining resources

Investments and Concessions - 5.4% of group revenue
Investments and Concessions consists of transport concessions and property developments.

• Investments and Concessions delivered another strong performance despite weak concessions markets
• Revenue, which consists primarily of fees for the operation and maintenance of toll roads, increased by 27.5% from R334,7 million to R426,7 million
• Core operating profit was up 18% to R89,3 million (H1 F2013: R75,6 million)
  • This operating profit includes fair value adjustments of R28,4 million (H1 F2013 R29,1 million)
• The core operating profit margin decreased from 22.6% to 20.9%

Engineering & Construction - 20.2% of group revenue

The E+C business was established to deliver technology-based EPC, multi-disciplinary project management and construction, as well as operations and services solutions to selected growth sectors such as power, oil and gas and water. It continues to expand rapidly off a burgeoning order book in power and oil and gas.

• During the period, revenue increased by 289.4% from R408,1 million (79% local) to R1,6 billion (98% local)
• Core operating profit was up 336% to R49,4 million (H1 F2013: R10,6 million)
• This resulted in a core operating profit margin of 3.1% (H1 F2013: 2.6%) in line with expectations

The secured one-year order book stands at R2,0 billion (83% local) (F2013: R2,5 billion and 91% local). The full secured order book stands at R2,5 billion (78% local) (F2013: R3,9 billion and 85% local).

Manufacturing - 6.8% of group revenue
Manufacturing consists of fibre cement building products business, Everite, as well as steel fabrication businesses BRI and Group Five Pipe.

• Revenue increased 4.7% from R508,6 million in H1 F2013 to R532,7 million
• The reported core operating profit increased by 21% from R34,7 million to R42,1 million
• The core operating margin was 7.9% (H1 F2013: 6.8%)

Construction - 67.5% of group revenue

• Construction continued to be the largest cluster in the group
• Construction revenue increased by 37.4% from R3,9 billion to R5,3 billion
• Core operating profit increased by 11% from R139,1 million to R154,4 million
• The overall Construction core operating profit margin declined from 3.6% to 2.9%

Over-border work contributed 32% (H1 F2013: 37%) to Construction revenues.

Building and Housing

• Building and Housing revenue increased by 46.1% from R1,5 billion (91% local) to R2,2 billion (98% local)
• The segment reported a 57.6% increase in core operating profit from R30,3 million to R47,8 million
• This resulted in the overall core operating margin percentage increasing from 2.0% to 2.1%.

The secured one-year order book stands at R4,3 billion (99% local) (F2013: R4,4 billion and 98% local). The total secured order book stands at R6,6 billion (99% local) (F2013: R5,6 billion and 98% local).

Civil Engineering

• Civil Engineering reported a 40.7% increase in revenue from R1,5 billion (61% local) to R2,1 billion (54% local)
• Core operating profit was down 35% to R31,7 million (H1 F2013: R48,8 million)
• Core operating margin was down from 3.3% to 1.5%
  • Civil Engineering experienced record revenues, with the underlying business generating margins as guided in the group's November 2013 update to stakeholders. However, as outlined earlier, margins have been impacted by management's more cautious view on the estimated final completion margin on two contracts

Civil Engineering's secured one-year order book stands at R2,7 billion (54% local) (F2013: R3,1 billion and 50% local). The full order book is at R3,4 billion (63% local) (F2013: R3,5 billion and 56% local).

Projects

• Revenue increased by 16.8% from R872,7 million (19% local) to R1,0 billion (28% local)
• Core operating profit increased by 25% from R59,9 million to R74,8 million
• The core operating profit margin percentage increased to 7.3% (H1 F2013: 6.9%)

The secured one-year order book stands at R1,2 billion (48% local) (F2013: R1,1 billion and 41% local). The full secured order book stands at R1,5 billion (52% local) (F2013: R1,2 billion and 37% local).

Issued by:

Notes:
*The board of directors of Group Five resolved to dispose of the businesses that constitute the Construction Materials cluster in 2012. The group is therefore required to account for the Construction Materials operating cluster as a discontinued operation and Non-Current Assets classified as Held for Sale.
**Selected Accounting Standards and Amendments to Accounting Standards, which became effective for the first time in the current reporting period, namely IFRS 11: Joint Arrangements, IAS 19 (Revised): Employee Benefits, IAS 28: Investments in Associates and Joint Ventures, have necessitated retrospective application of the Statement and a restatement of prior year comparatives in line with these revised requirements.

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