Small-cap Esor has become the second JSE-listed firm to submit its construction subsidiary to business rescue proceedings in two months amid a spectacular crunch in cash flows and the drying-up of infrastructure projects from government.
Despite submitting its R958 million annual revenue construction subsidiary for business rescue to stave off the worst-case scenario of liquidation, Esor CEO Wessel van Zyl is convinced that the business can be rescued.
“We believe Esor Construction has prospects for success. We have some assets that are liquid and investments that will unlock cash flows. But it’s all in timing and allowing the business rescue process to continue,” Van Zyl tells Moneyweb.
Arguably Van Zyl’s optimism is dented by a construction industry that is buckling under the weight of a stumbling economy.
Esor joins a growing list of struggling construction companies or subsidiaries that are undergoing business rescue proceedings, including JSE-listed Basil Read and unlisted Liviero Group. Meanwhile, the sector is primed for consolidation with Aveng being a takeover target of Murray & Roberts, a bid M&R has since abandoned.
Esor announced on Monday that it filed for business rescue after it failed to secure funding from a consortium of financiers to settle R130 million it owed to creditors.
Only its South African construction subsidiary – which holds building, infrastructure, housing, pipelines, sanitation and pipe services businesses – is under business rescue proceedings. Its development subsidiary and its operations in Zimbabwe, Swaziland, and Botswana are excluded.
A business rescue process is intended to restructure a company and help it to return to profitability. In Esor’s case, the company will use the business rescue proceedings to buy it more time by pausing payments to creditors and negotiate favourable payment terms while it attempts to generate profits from its underlying businesses.
Van Zyl says Esor creditors are yet to approve and agree to the rescue plan. Hans Klopper and Dawie van der Merwe from BDO Business Restructuring have been nominated as joint business rescue practitioners.
Van Zyl believes business rescue would help Esor’s existence as a going concern, which hinges on Esor redeeming debt amounting R60 million owed to it from infrastructure projects; the option of selling land parcels it owns, which could unlock R40 million; and existing projects that might free up a further R80 million.
He admits that the survival of the construction subsidiary depends on its ability to source new projects. But this is proving to be difficult.
“We have not been awarded work, especially in the water pipeline business. We have not been awarded a single job this year from Rand Water, municipalities and the Department of Water and Sanitation. There are massive delays in processing new work.”
Submitting for business rescue was the “last resort” after taking various measures, including renegotiating payment terms with major suppliers and subcontractors, selling development land, and effecting retrenchments.
Esor is in a precarious financial position due to losses incurred on certain construction contracts. Its order book for the year ended February 2018 reached R881 million compared with R1.54 billion during the previous year.
Van Zyl says Esor construction contracts with a value of more than R600 million had either been cancelled or delayed. It recently took losses to the tune of R170 million on bulk water projects in Durban.
Esor reported a net loss of R306.9 million for the year to end February 2018 compared with a loss of R140 million in its 2017 financial year.
Esor shares finished 50% lower on Monday at 4 cents. Asked if there is still merit in Esor, a R39-million market capitalisation company, remaining listed on the JSE, Van Zyl says it has battled to find investors that would take the company private after 13 years on the local bourse.
“We have, over the last year, tried to attract investors and delist. But investors have taken a wait-and-see approach to see if the construction industry improves.”