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More blood in the water at Group Five

And the sharks are circling….

The share price of struggling construction company Group Five closed 0.09% higher on Tuesday at R11.11, despite news that its interim loss per share in the period ending December 31 2017 could widen by 35.5% to 409c, compared with the same period last year.

Its interim headline loss per share is expected to widen by 33.8% to 415c.

The group disclosed additional delays and challenges on its $410 million (R5.2 billion at today’s exchange rate) Kpone independent gas- and oil-fired combined cycle power plant EPC contract in Ghana.

Group Five has been contracted for the design, engineering, procurement, construction, commissioning and testing of the 350MW power plant.

It indicated in its annual results presentation in August that there were delays in the project and that it would not be completed on September 13 as the contract stipulates. The group however gave guidance that penalties and contract claims considered together should not impact the project’s profit recognition in the current financial year.

Due to further delays Group Five warned shareholders that the project is expected to show a loss to date, excluding penalties and claims. It will impact the group’s interim earnings.

To fund the balance of the work on the Kpone project, Group Five will use half of the €40 million (R6 billion at today’s exchange rate) free cash held by its investments and concessions business in Europe.

Project penalties are calculated at a rate of $310 000 (R3.9 million) per day to a maximum of $62.5 million (R799 million), Group Five says. It does not quantify its calculation of its entitlement, but warns that the timing of the settlements is uncertain.

Group Five further warns that its construction and EPC cluster is performing below expectations. This it says, will impact the interim and annual results for the current financial year as well as free cash reserves.

The group is proceeding with its restructuring and downscaling of its construction and manufacturing businesses.

It has commenced with the sale of its Group Five Pipe manufacturing business for a consideration of R80 million as well as cash on hand of about R25 million. The proceeds will be kept in Group five Construction and applied where necessary.

The group is working on the sale of its other manufacturing assets.

It is however its crown jewel – the investments and concessions business with its annuity income – that continues to attract attention from prospective buyers.

Group Five in October rejected an offer from Greenbay Properties to buy its European concession stakes, Bulgarian assets and Intertoll Europe operations & maintenance contracts for R1.6 billion. The offer was very rushed and Group Five said it could not deal with it properly in the limited time given by Greenbay.

The investment and concession business has long been a differentiating factor for Group Five, providing a stable and regular income that mitigates construction volatility.

On Tuesday Group Five again indicated that prospective buyers continue to circle these assets and operations. It said the board “continues to objectively assess the credible expressions of interest received, with a view to maximising shareholder value, notwithstanding that these assets and operations are deemed to be core to the group”.

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