The share price of cash-strapped construction group Group Five improved on Wednesday following news that it has finalised bridging finance and negotiated a debt standstill with some creditors.
This makes Group Five the second construction giant after Basil Read to enter into a debt standstill agreement as a survival tactic.
By late afternoon on Wednesday Group Five’s share price was up 1.17% at R2.60, which is a far cry from the R11.40 just six months ago. The Basil Read share price was a mere 21c, compared to 68c six months ago and R1.89 a year ago.
The drop in Group Five’s share price over the last six months reflects the extent of the company’s problems on its Kpone power project in Ghana on which it lost R649 million. This came against the background of a shrinking local construction order book and costly restructuring.
In April Group Five was late in reporting a R775 million interim operating loss, more than double the R339 million reported a year before. Cash dropped from R2.3 billion at the end of June 2017 to R1.7 billion at the end of December.
The order book shrunk by R1.2 billion from the R13.4 billion in June last year.
The group said in April that it had entered into an agreement with a consortium of local bankers for R650 million of short-term bridging finance. This has now been finalised and will give the group some breathing space for the next 12 months.
It however had to pledge its crown jewels as security, namely its manufacturing assets, European service concessions and European operations and maintenance business.
The European businesses, specifically, have long differentiated Group Five in the construction industry and with its high margins and regular income played a stabilising role in a volatile industry.
The group has resisted many advances from prospective buyers for these core businesses.
On Wednesday Group Five addressed the risk of losing these businesses in its communication to the market. It repeated its earlier stated intention to obtain some kind of funding from shareholders to repay the bridging finance and said that “would prevent the unintended disposal of core group assets”.
Group Five also for the first time mentioned a debt-standstill. It announced that it reached an agreement with the consortium of bankers and an unnamed insurance partner that will ensure that these creditors “do not terminate any of their existing facilities or cancel or reduce any available commitment or limit in terms of their existing facilities, and to provide a temporary suspension of any enforcement action under the existing funding documents”.
The debt standstill will continue until the bridging finance is repaid “or any event of default”. It is expected to remain in place for the twelve months ended May 11 2019.
Group Five is in the meantime kicking on doors and turning stones to improve its cash position and hopes to see the results over the next 18 months. The sale of its interest in the Group Five Pipe has just been finalised and has resulted in a welcome R80 million cash inflow.
All these measures, Group Five says, are aimed at buying “sufficient time to stabilise and further de-risk the Construction businesses” prior to fulfilling its transformation obligations in terms of the earlier industry agreement with the South African government.
Its peer Basil Read announced in December that it had reached an 18-month debt standstill agreement with six creditors, including the Industrial Development Corporation (IDC), Investec and Standard Chartered Bank.
This agreement stayed any plans for debt enforcement by the respective creditors in exchange for security over identified assets and on condition of among other things a successful rights offer and extensive restructuring.
At that stage Basil Read’s auditors flagged material uncertainty about its status as a going concern and it recorded a net loss of R1 billion for the year ended December 31. It obtained R150 million in bridging finance.
Since then Basil Read has successfully raised R300 million in a rights issue, has repaid the bridging finance and reduced debt from R815 million to R600 million.
But although CEO K2 Mapasa tried to show that Basil Read has made progress on its road to recovery since December, the market does not seem interested. The share price has not moved materially since February.
Analysts approached by Moneyweb have little interest in Group Five and Basil Read, with one referring to them as “rubbish companies”.
Dr Roelof Botha, economic advisor to the Optimum Group says the declining fortunes of some listed construction firms should not be regarded as a barometer for conditions in the construction industry at large, which has expanded by more than 14%, in real terms, since 2010 (based on its total output).
The Afrimat Construction Index, which measures activity in the building and construction sector, shows that the sector continues to outperform the economy by a considerable margin, says Botha who compiles the index.
From the third quarter of 2010 to the end of last year the index expanded by 27.3%. “This is considerably higher than the rate of growth of 15.8% for the economy as a whole over this period (in real terms),” he said.