Summary

• Revenue down 6% to R11,3 billion (2009: R12,1 billion), mainly due to a reduction in domestic construction materials volumes and in African resources markets
• Headline earnings per share increased by 8% from R5,68 to R6,14 and fully diluted headline earnings per share increased by 10% from R5,08 to R5,61
• Earnings per share of R2,80 was 48% lower than that of the prior year of R5,44 per share due to a Construction Materials impairment adjustment
• Operating profit before fair value adjustments and impairment adjustments increased by 10% from R797 million to R877 million
  • Included within operating profit is a surplus on the group pension fund of R55,2 million (2009: deficit of R11,5 million)
• The group operating profit margin was 7.7% (2009: 6.6%)
  • For comparative purposes, the group provides both the group’s reported operating margins and those net of the non-core/headline transactions of profit/loss on sale of assets, pension fund surpluses and deficits, fair value adjustments, and profit/loss on sale of investment properties. This is called the core operating margin, as it reflects the underlying operating performance. Both margins exclude the impairment on long-term assets adjustment. The core operating margin is 7.3% compared to 6.7% in 2009
• The group generated R327 million in net cash, with R1,2 billion cash from operations during the year under review
  • The improvement was as a result of continued generation of cash profits and a focus on maintaining working capital levels
• The final dividend of 74 cents per share (2009: 72 cents) brings the total dividend for the year to 137 cents per share (2009: 130 cents), a 5% increase for the year

Commenting on the results, Group Five CEO Mike Upton, said:

“During the year, the markets in which we operate experienced increased volatility and uncertainty, mainly as a result of the global financial stresses, as well as due to a hiatus in South African public sector spending. Against these factors, we believe we posted a robust result, with delivery against our key financial goals of margin, cash generation and gearing. We are particularly pleased with the strong margin performance of 7.7% compared to 6.6% last year.

“The performance and excellent track record of contract delivery achieved during the period would not have been possible without the significant operational discipline and the dedication of all our people, who once again demonstrated fortitude and resilience under challenging circumstances. We successfully delivered 2010 World Cup contracts and extensive national infrastructure work in ports, roads, water and energy, including the Moses Mabhida soccer stadium, the King Shaka International Airport and the widening of the Durban Harbour. All contracts were delivered ahead of, or in line with, contractual programmes and were achieved in parallel with an ongoing commitment to training and continuous improvement drives with respect to quality and contract execution. The resulting enhanced efficiencies allowed us to improve our construction margin and our cash position.”

Looking ahead, Upton said:

“We will continue to grow our expertise and capacity in areas where we have developed a multi-disciplinary delivery capability, namely power, transport and water, mining and large infrastructure works, with a geographic expansionary stance.

“Although growth in the year ahead could be slow, our current order book and pipeline of opportunities support a generally positive outlook. Our Construction one-year order book as at 30 June stands at R7,1 billion (2009: R8,6 billion). The group’s total secured Construction order book stands at R9,3 billion (2009: R11,6 billion). The value of the group’s target pipeline as at 30 June stood at R119 billion, up from R115 billion in February 2010, with activity in all our markets, although with some timing uncertainty.

“In terms of growth areas, the South African government’s public works programme – specifically in the areas of power generation, transport, water and housing – has the potential to create opportunities within the South African construction sector. The African outlook for private sector fixed investment and primary infrastructure has started to improve, but spending is likely to only come through slowly during the 2011 calendar year, with more certainty emerging from 2012.

“In the Middle East, the group has moved into new territories outside of Dubai. These markets provide technically attractive opportunities aligned to the group’s capabilities in infrastructure contracts related to industrial works, power, transport and water.”

OPERATIONAL OVERVIEW
INVESTMENTS AND CONCESSIONS
Investments and Concessions consists of Infrastructure Concessions and Property Developments. This cluster contributed 5.2% (2009: 5.2%) to group revenue.

Infrastructure Concessions
This segment demonstrated an expected and consistent performance, with growth in both revenue and profit, despite the effects of the deep recession across the Eastern Europe region.

• Revenue, which consists primarily of fees for the operation and maintenance of toll roads, and toll equipment supply to new contracts increased by 6% from R527,9 million to R557,2 million
• The core operating profit margin remained largely unchanged at 15.1% (2009: 15.2%), with reported operating profit increasing by 7.5% to R85,6 million (2009: R79,6 million)
• The cluster also recorded fair value adjustments of R13,5 million (2009: R15,7 million)

Property Developments
Although Property Developments did not generate positive returns during this financial year, its performance was in line with expectations, as the group progressed its strategy of disinvestment from the residential sector in favour of securing A-grade commercial and retail property development positions in South Africa

• As expected, revenue decreased by 65% from R98,9 million in F2009 to R34,6 million
• This segment posted an operating loss for the year of R10,7 million (2009: profit of R2,3 million). No fair value adjustments on investment properties were reported this year or in the prior year
• The group anticipates a return to stronger results post F2011

MANUFACTURING
Manufacturing contributed 7.6% (2009: 6.8%) to group revenue.

The cluster produced resilient results in a market where both private and public sector conditions remained weak. The Fibre Cement business unit achieved reasonable returns by establishing alternative income streams, whilst removing costs within the traditional business model. The group continued to build the Structural Steel business unit under new leadership in a market of volatile input costs and high levels of pricing pressure, as supply exceeded demand. Group Five Pipe benefited from increasing demand for bulk water transport systems.

• Revenue increased by 6.1% from R816,1 million to R866,2 million
• The reported operating profit repeated the prior year’s delivery of R86,8 million (2009: R86,0 million) although the overall core operating profit margin percentage decreased to 9.5% (2009: 10.6%)

CONSTRUCTION MATERIALS
Construction Materials contributed 4.3% (2009: 5.6%) to group revenue.

This cluster experienced a particularly tough trading year, with volumes and prices depressed by the slow roll out of public infrastructure and current recessionary pressures in the residential property market. Against the weakened market conditions applicable to the Construction Materials cluster and the uncertainty around the timing of a recovery, management adopted a cautious consideration of the carrying value of these assets and processed an impairment of R326 million.

Against these difficult markets, the cluster was re-engineered and re-sized to operate profitably on lowered volumes to create improved returns as the market recovers. Structural, management and operational changes were implemented and a detailed market validation and asset verification and valuation exercise undertaken. Process costs have been reduced and efficiencies gained to limit the margin impact from depressed volumes and prices. A gradual recovery is expected over the next 12 – 18 months.

• Revenue decreased by 27% to R492 million (2009: R671 million)
• Reported operating profit decreased by 64% to R20,2 million (2009: R55,8 million) and the overall core operating profit margin decreased to 3.6% (2009: 8.4%).

CONSTRUCTION
Construction consists of Building and Housing, Civil Engineering and Engineering Projects. It contributed 82.8% of group revenue (2009: 82.5%).

• Construction revenue decreased by 6% from R9,9 billion to R9,4 billion and reported operating profit increased by 21% from R573 million to R695 million. This resulted in a pleasing overall core operating profit margin percentage of 6.9% (2009: 5.8%).

Building and Housing
This segment posted strong results due to the on-time and very successful completion of large contracts, as well as the timeous securing of new over-border contracts and domestic contracts in public buildings and the educational and healthcare sectors.

• Revenue increased by 10% from R2,9 billion (98% local) to R3,2 billion (94% local). Total operating profit increased by 68% from R141,0 million to R236,6 million, resulting in the overall core operating margin percentage increasing from 5.0% to 6.9%
• The secured one-year order book stands at R2,6 billion (78% local) (2009: R3,5 billion and 90% local) and secured work at R3,5 billion (77% local) (2009: R4,6 billion (81% local)

Civil Engineering
Civil Engineering posted healthy results, from well executed contracts and a strong order book,aligned to South African primary infrastructure.

• This segment did well to maintain revenue levels from a high base in a year where Middle East activity was subdued.. Revenue increased by 1.7% from R4,6 billion (60% local) to R4,7 billion (83% local), while reported operating profit increased strongly by 38% to R310,7 million from R225,7 million
• This resulted in a core operating profit margin percentage increase to 6.2% (2009: 4.9%).
  • The secured one-year order book stands at R3,0 billion (85% local), compared to R4,2 billion (86% local) as at 30 June 2009. The full order book is at R3,8 billion (80% local) (2009: R5,9 billion (61% local)).
  • Based on the group’s tender pipeline, it expects material contract opportunities to realise over the next 12 to 18 months, both in terms of its target geographies and sectors. The group therefore remains cautiously optimistic about future prospects

Engineering Projects
Engineering Projects encountered a more difficult year, with many target projects in Africa and the Middle East delayed due to the financial constraints following the economic downturn. However, during the second half of F2010, a recovery in enquiry levels from the sub-Saharan African mining markets was experienced, which resulted in new contract awards. This trend is expected to continue in certain minerals categories. There was also a significant progression in the South African power, energy and mining markets over the past six months, which augurs well for a recovery.

• During the year, revenue decreased by 39.1% from R2,4 billion (12% local) to R1,5 billion (50% local) and reported operating profit decreased by 29% from R206,7 million to R147,7 million
• However, the core operating profit margin percentage improved to 9.4% (2009: 8.6%)
• The secured one-year order book stands at R1,4 billion (51% local) compared to 30 June 2009, with R921 million secured work (49% local). The full secured order book stands at R1,9 billion (64% local) (2009: R1,1 billion (43% local))

Issued by:

With Transnet as the client, the R2.2-billion contract was completed three weeks ahead of schedule by Group Five and Dredging International working closely with the consulting engineers, HMG – a joint venture between Hatch, Mott MacDonald and Goba. The event was attended by local dignitaries, as well as foreign and local business representatives.

Acting group chief executive of Transnet, Chris Wells, as main speaker was joined by Mike Upton (CEO Group Five), Alain Bernard (CEO Dredging International) and Truman Goba representing HMG, each of them expressing their thanks for a job well done. Chris Wells pointed out that the project forms part of Transnet’s R93-billion capital investment programme over the next five years. “We are particularly proud of this achievement … operationally it will help us meet the stringent targets we have set ourselves on improving efficiency in our ports through reducing shipping delays and improving terminal operations.”

Referring to the event as marking an ‘historic achievement’, Mike Upton outlined the scope of works pointing out that most of these were now under water. “Even by world standards the project was large and complex and Group Five and our partners from Holland, Dredging International, take great pride in having delivered the project three weeks ahead of schedule after a 147 week construction programme. “The early completion was a result of the performance of the construction workforce and the excellent team work that existed between our construction group, our subcontractors and the Transnet appointed project management team from HMG.”

He emphasised the challenge posed by the strict safety requirements due to the complex, dangerous and intensive nature of the project. “Over four million man hours have been worked to date, thankfully with no fatalities,” he said, adding that working in a sensitive marine environment and in close proximity to uShaka Marine World imposed further stringent precautions.

“Over 2000 job opportunities were created during the course of the contract with a peak of over 800 people on site in March 2009. In terms of spreading the benefits into the community, we achieved a high level of skills transfer and managed to place over 63% of our portion of the project procurement with Black owned companies.”

In conclusion Mike thanked the project leadership and workforce from Group Five for their dedication and for the many long days and late nights that demonstrated their commitment, and to Transnet for placing its faith in Group Five and Dredging International to deliver this project on time.

The Project

The project involved widening the harbour entrance by 100m to 225m wide and deepening it to an average of 18m to give access to the new generation post panamax container vessels.

Group Five and Dredging International started on the contract in May 2007. The scope of works included:

• Increasing the channel width by 100m to accommodate larger vessels in a safe manner
• Deepening the outer channel by an average of nine metres
• Extensive dredging works
• Re-armouring and raising the height of the south breakwater
• Demolishing of buildings and other structures on the north bank
• Demolishing of the old north break water and construction of a new north groyne
• Construction of a new north bank revetment Provision of aids to navigation (temporary and permanent)
• Construction of a temporary sand bypass facility
• Removal of the old services tunnel that traverses the entrance channel from north to south

Project manager, John Hopewell, describes the work. “During the course of the contract 10 million cubic metres of material was dredged from the sea to widen and deepen the entrance channel and 655 000 tons of rock was sourced from a commercial quarry for the construction works. Besides this over 8000 antifer cubes weighing between 10 tons and 45 tons, and 1000 dolosse each weighing 20 tons were cast in two precast yards.”

Of some interest is that the dolos was designed in South Africa in 1963 and the antifer cube in France a decade later. Both elements are designed to withstand the powerful stress of pounding waves and are still used in marine projects worldwide.

Amongst the challenges faced by the team was the weather that made working on the south breakwater particularly hazardous. “Satellite weather monitoring systems were employed to assist in forecasting the onset of bad weather which would require the closing down of operations and pulling all small plant and personnel off the breakwater as a safety precaution,” says John.

On the lighter side, the dredging operations revealed numerous interesting obstacles ranging from tyres, anchors and chains to railway wagons, a bull dozer and an old shipwreck.

Since the start of the contract in April 2008, Group Five in joint venture with Power Construction has been working towards this scheduled milestone which was reached in spite of heavy traffic flows and bad weather.

At the core of the R690-million contract for the expansion of the interchange, which links the M5 with the N1 east of Cape Town, are two new ramps over the Koeberg Interchange. Ramp A connects the N1 incoming to the M5 while ramp B will connect the M5 to the N1 outgoing. This will take traffic over the interchange and not through it, reducing congestion in what has for years been a traffic bottleneck. With ramp A now open, the joint venture will turn its attention to the completion of ramp B which is scheduled for November 2011.

“The challenges posed by the dense traffic flows are exacerbated by a busy railway line and underground services,” points out construction manager, Johan van Nieuwholtz. An army of flagmen and women maintain the traffic flow and the safety of the team working close to the railway line.

The contract includes the construction of two new bridges linking the M5 to the N1, widening the M5 viaduct, the construction of 3km of additional lanes to the N1, two outbound and one inbound, to assist with traffic management from the CBD during the World Cup.

The joint venture partners are working closely with the consulting engineers, HHO Africa and the client, the Western Cape Provincial Government to ensure the safety of the public and the workforce through carefully planned traffic accommodation.

In addition, the M5 Viaduct is to be widened with two lanes over the existing Koeberg Station railway tracks and the Salt River canal has been realigned 15metres to the west, to accommodate the M5 widening.

The world class facility was completed by a joint venture comprising Group Five, WBHO and Pandev, who celebrated the event with representatives of the eThekwini Municipality as the client, the professional team ILC and subcontractors.

The stadium is being hailed as a ‘state-of-the-art landmark sports facility with excellent amenities, architectural and engineering ingenuity and a sustainable recreational and multi-disciplinary sporting venue.’

The joint venture partners started work on the R3,1bn stadium in July 2006.

The superstructure was completed in October 2008 and in January 2009 the erection of the iconic arch started.

The six levels of the stadium are supported by 1 750 columns and 216 raking beams that provide the main support to the seating panels. A total of

1 780 pre-cast concrete seating panels create the bowl form that encircles the stadium.

The Moses Mabhida Stadium has been built as a 56 000-seater stadium, with the capacity to seat 70 000 spectators during the 2010 FIFA World Cup and seating can be further expanded to around 80 000.

Catching the eye – and changing Durban’s skyline forever – the stadium’s arch of triumph is 350m long and rises to a height of 106m. The arch symbolises the uniting of a once-divided nation. A tourist attraction in its own right, it features a sky car that ferries visitors to a viewing platform at arch’s highest point, where they can enjoy a breathtaking 360-degree view of the city and the sea.

The stadium has also already won numerous awards in the areas of safety, quality of construction and innovation including the Overall Winner at the Southern African Institute of Steel Construction’s Steel Awards 2009 and the Concrete Society of Southern Africa’s 2009 Fulton Award for Unique Design Aspects.

Thanks to an unrelenting adherence to safety regulations the project was the winner of the Master Builders South Africa (MBSA) 2008 National Safety award for contracts valued at R500-million and more.

The structures include a 320 metre long, 17m high viaduct; five post tensioned bridges varying from 125m to 79m long and three underpasses each 120m long. Ancillary works include 140km of civil works for telecommunication sleeves, street lighting, traffic signage, drainage and diversion of existing services.

Contracts manager, Chris Scheepers, reports that the project forms part of a development corridor and ring road system constructed to divert heavy traffic away from the capital, Amman some 35km to the south east, which is en route to Iraq, Syria and Saudi Arabia.

“The duration of the project was originally 1000 calendar days but due to scope changes an extra 487 days extension of time was granted and the completion date is set for mid September 2010.”

The criteria for the annual awards include the evaluation of the level at which companies communicate with the market; a company’s presentations, annual reports, websites and investor relations’ initiatives, ensuring that they meet the needs of a wide stakeholder base, from investors to private wealth managers.

CFO Cristina Teixeira, who accepted the awards, thanked the IAS for their acknowledgment. “We are particularly proud to have been selected as the overall winners as we were up against some high calibre competitors, which included financial institutions and our peers in the industry.”

Cristina gave due credit to her finance and production teams who work long hours to deliver the annual report on the same day as the release of the year end results. “This is a practice we started some years ago and one that we will maintain, thanks to the exceptional efforts of the teams involved in its production.”

The Group was also the winner in the Basic Industry and Manufacturing sector of the JSE Limited for the fourth year in a row. This is a big sector covering a broad span of South African listed groups in diverse industries, so there was strong competition.

These awards are the most comprehensive benchmarks of stakeholder communication in South Africa, as the IAS has the widest financial membership in the country. The IAS looks at how companies communicate with the market, ensuring that they meet the needs of a wide stakeholder base, from investors to private wealth managers. A company’s presentations, annual reports, website and investor relations initiatives are evaluated when judging the winners.

CEO Mike Upton reports that the Group’s progression in terms of communicating effectively with its audiences has not been an overnight process. “A number of years ago we undertook an in-depth survey to identify what the market thought of Group Five. The feedback was mainly one of frustration and lack of trust, stating that Group Five and its construction peers was a ‘black box’.

“Since then it has been our specific objective to make the group more easily understandable and more transparent. It has included investing a lot of time and money into our systems, ensuring we can report to the market soon after our financial period ends and that we bring out our Annual Report on results day – no easy feat!

“Our feedback over the last four years has indicated that the investment community rates our disclosure as the best in its sector. This stood us in especially good stead during the volatile and competitive economic trading conditions globally. Investors know they get the truth from us, which reduces investment risk.”

Speaking at the event, a member of the Investment Analysts executive committee commented that Group Five’s communication and reporting publications stood ‘head and shoulders’ above the competition this year, since these publications are traditionally reviewed and relied upon by bankers, financial analysts, credit agencies, shareholders and clients and customers.

The awards were received by Group Five CFO, Cristina Teixeira.

Nearest rivals in the overall Top 100 list in the sector were WBHO in 51st place, Murray & Roberts coming in at number 56 and Aveng in the 57th place.

CEO Mike Upton says: “We are unique in our sector with a black woman as chairperson and one of the only listed company boards in South Africa to be led by a woman. Our main board comprises four female directors plus our company secretary, with six of our directors being black.

“This award is recognition for the transformation work that has been done over the last few years to all the elements of broad based black economic empowerment – not least in procurement, skills development and enterprise development.”

“We are a level 3 BBBEE contributor, which is the best rating in our sector. However, we should not rest on our laurels as there is still much to do in terms of employment equity and in our quest to keep our industry leadership in the years ahead.”

The group`s net finance income position of R7,6 million is a substantial improvement over prior periods during which net finance costs were incurred. The group balance sheet continues to be sound, with a nil net gearing ratio as at 31 December 2009. The net increase in cash and cash equivalents for the period was more than double that of the prior period, with a R464 million increase (2008: increase R222 million). Similar to the prior comparative period and 2009 financial year, the increase in cash was achieved as a result of a focus on working capital management and increases in cash generated from operations.

The effective taxation rate of 32% was a function of reduced taxation on income from jurisdictions with taxation rates lower than the South African corporate tax rate. This was offset by an increased taxation charge due to STC on dividends and taxation from African jurisdictions with taxation rates higher than the South African corporate tax rate.

The interim dividend has been increased by 8.6% to 63 cents (2008: 58 cents) congruent with the current dividend cover policy of approximately four times covered.

Further to the group`s previous statement regarding the unwind of the iLima Consortium shareholding, it confirms that the process continues and the group has asked the courts to make a declaration confirming such unwind. As previously reported, this unwind will have no material bearing on the group`s results, nor its BEE status due to the BBBEE scorecard improvements made across all its businesses. The group remains a Level 3 BBBEE contributor. During the last few years, the group increased its proactive stance in mitigation of the risk of any instances of lack of compliance with respect to Competition Law. The group has undertaken internal investigations, training and awareness to ensure full compliance and will continue with its proactive and cooperative stance as the investigations into the construction industry progress.

View results and presentations

PPP project for Department of Basic Education successfully handed over on time and within budget

Group Five today announced that it was issued with a Certificate of Completion from the Department of Education for the successful completion of a new serviced Head Office for the Department of Basic Education in Pretoria. The PPP is a 27-year project, ranging from construction through to operations and maintenance.

Group Five’s Building business unit was the lead construction partner on this PPP, which started in 2007. Its joint venture construction partners were Makhosi Infrastructure and Fikile Construction.

“The success of this project can be attributed to effective partnering across all stakeholders. The level of contractual complexities inherent in PPPs do not easily allow for variations during the construction phase. However, our deep understanding and experience of the risk allocations within PPPs enabled us to accommodate two significant changes during the project while still completing on time,” said Group Five CEO Mike Upton.

Group Five has more than a decade of experience in the PPP/concessions market, having invested in or operated contracts in South Africa, Hungary and Poland. The group is currently pre-qualified for a number of other South African PPP projects across the transport, energy and buildings sectors. In a number of these cases, concessions vary from 15 to 25 years. If successful, these contracts are therefore set to provide the group with further secured construction and investment opportunities.

PPPs have been identified by the South African government as a means to deliver infrastructure contracts through the involvement of the private sector, as these partners can design, construct and manage assets, as well as raise debt and provide equity, thus reducing the burden on national resources.

Upton concluded:
“The financial engineering and operating models of concessions or PPPs require an in-depth knowledge of structured project finance, debt and equity raising, engineering, design and construction contracts and operations and maintenance, which we have managed to deliver on. We are extremely proud of this, as it has once again proven our ability to deliver on extremely complex projects and work with a number of different partners. It is also another example of our ability to work across the infrastructure value chain to receive income across a contract and not just from the construction portion.”

“We are also extremely pleased about the safety on this project, with no fatalities and only two minor injuries over the three years – a great achievement. Furthermore, we procured 38% of our contract value through BBEEE companies and 45% through SMMEs working in Tshwane. Both these initiatives empowered the community around the facility, something we rate highly.”

Notes to editors:
The facility provides A-grade office accommodation:

• Consisting of a low rise structure with two parking basements and ground, plus three levels of offices
• It includes a refurbished historical building – Jansen House and its stables
• The constructed area is approximately 52 000m2 and the rentable area approximately 34 000m²
• It houses approximately 1 200 Department of Basic Education employees, includes secure printing facilities for national examinations and has a conference centre and ministerial office accommodation

Issued by:
HG Strategic Communications
011 465 0484

Heidi Geldenhuys
083 325 8924

Enquiries:
Mike Upton, CEO
011 806 0246 ]]> http://groupfive.investoreports.com/corporate/group-five-delivers-on-r403-million-private-public-partnership-ppp-project/feed 0