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Group Five sacrifices East European investment to ease liquidity

Set to become a smaller company with less exposure to construction risk and volatility.

Struggling construction entity Group Five announced on Tuesday that it would sell the biggest chunk of its investment in Intertoll Capital Partners (ICP), a joint venture with Aberdeen Infrastructure Funds (AIF), to relieve pressure on its liquidity.

The announcement was made at the release of the group’s financial results for the year ended June 30. Group Five CEO Themba Mosai describes the past year as extremely difficult as the group retrenched about 1 000 workers to reduce cost in a wide-ranging restructuring.

The Group Five board decided to reduce the group’s stake in ICP from 50% to 10% after it realised that the losses incurred on its embattled Kpone Thermal Power Station project in Ghana exceeded expectations.

Mosai says the reduction of the investment in ICP does not affect the group’s operations and maintenance contracts in relation to the toll assets in Poland and Hungary.

Group Five sold 50% equity in ICP to AIF at the end of 2016. AIF is a subsidiary of UK-based Aberdeen Asset Management, one of the biggest fund managers in the world. The group hoped that this partnership would open opportunities for participation in operations and maintenance of concession assets globally, without having to invest large amounts of equity.

These contracts deliver annuity income at a considerably higher margin than traditional construction projects and provide a buffer for the volatility of the construction market.

Group Five is in fact in the process of restructuring itself to focus primarily on its developments, investments, operations and maintenance businesses in the power, water, transport and real estate markets.

The group’s in-house tolling system has been approved by the South African National Roads Agency (Sanral) and is ready to roll out on the rest of the continent, Mosai says.

It has already sold Group Five Pipe and is in the process of selling the rest of its manufacturing businesses, while the construction and Engineer, Procure and Construct (EPC) and Turnkey Project Solutions (TPS) businesses are being scaled down considerably.

This is expected to result in a smaller company with less exposure to construction risk and volatility, doing business at a higher margin.

The group’s share price increased by 10c from 95c to R1.05 on the back of the results. A year ago the share price stood at R10.26.

The group recorded a 26.2% decrease in revenue to R7.3 billion. The investment and concessions business however grew revenue by 11% compared to the previous financial year. The core operating loss grew from R659.4 million in the previous financial year to R1.3 billion, mostly because of the loss on the Kpone project which reported in the EPC cluster.

Headline earnings per share weakened from a loss of 853c per share in F2017 to a loss of 1 381c in F2018

The group said it had limited free cash at year-end. The cash flow stabilised and the sale of the ICP stake and manufacturing businesses is expected to relieve pressure in this regard. The proceeds of the ICP transaction will be used to repay the bridging finance the group secured earlier.

The secured operations and maintenance order book stood at R4.8 billion at year-end, of which R1 billion is expected to realise in the current financial year. A year before it totalled R5.8 billion.

The contracting order book shrunk from R8.7 billion a year before to R5.1 at year-end. Mosai says market conditions remain challenging in South Africa, but there are some imminent awards elsewhere on the continent.

He announced that Group Five financial director Cristina Teixeira has resigned and will leave the group on December 15. She was with Group Five for 16 years, the last eight of which saw her serve on the board.

“Cristina has been instrumental in managing the group through extremely volatile conditions over the years, with this past year being particularly challenging,” said Mosai. “She spearheaded the procurement of the bridge finance facility during the first half of the year under very trying circumstances. This facility paved the way for Group Five to continue implementing significant changes and the restructuring initiatives in the Construction cluster.”

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