Some Competition Commission relief for Group Five

Lack of collusion evidence in Sendzimir Mill tender.

Construction group Group Five received some good news from the Competition Commission on Wednesday as it announced a drop of 46.7% in headline earnings per share (HEPS) for the six months ended December 31 2014 to 109c.

The commission announced that due to a lack of evidence it will not refer the Sendzimir Cold Rolling Mill tender to the tribunal. Group Five was implicated in collusion in relation to this tender.

Group Five earlier received conditional leniency from the commission for coming forward with information about wide-spread collusion and bid-rigging in the construction industry. This led to the commission’s fast-track settlement process in which it settled with most of the major players in the industry for an aggregate amount of R1.46 billion. Group Five is the only one of the big players that has so far escaped such penalties.

In the process, the industry suffered serious reputational damage, its relationship with government was compromised and share prices took a dive.

Group Five was implicated by other companies in four instances that were not detected in its internal investigations, but has maintained all along that it does not have evidence of wrong-doing and is therefore not prepared to settle.

One of these matters has been referred to the tribunal and Group Five has welcomed the opportunity to argue its case at that forum. The commission announced on Wednesday that it has decided against the referral of one of the other three, namely the Senzimir Cold Rolling Mill tender, which means it still has to make a determination on the remaining two.

The non-referral reduces the uncertainty relating to possible administrative penalties the group may incur in future.

Disappointing results

The news came as Group Five published a disappointing set of results reflecting a weak performance by its civil engineering division that recorded a R44.4 million loss for the six months. In the first half of the previous financial year it showed a R31 million profit.

Group revenue from continuing operations decreased by 12% to R6.9 billion, mainly as a result of the large order book traded in the energy and civil engineering division in the prior period, the group said.

Group core operating profit decreased by 35.5% to R216 million with all other divisions performing as expected.

The group’s total operating margin decreased from 4.2% on the corresponding period to 3%.

Group Five had a bank and cash balance of R3.1 billion (H1 F2014: R3.2 billion) at December 31 with a zero net gearing ratio.

The share price dropped by only 1.38% on Wednesday as most of the bad news has already been discounted and stood at R25.05 shortly before market closure.

Civils, EPC contracts

Eric Vemer, who took the Group Five reins in December, said the loss-making civils contract that has weighed down the civil division nears completion. The project leadership was replaced and all cost to completion of the civil work has been taken to book.

Group Five would not disclose which project it was, but said its projects division will remain on the project after the completion of the civil works.

Group Five is part of the consortium doing the civil work at Eskom’s Kusile power station and Vemer said the progress has been “outstanding”. Group Five is expected to complete its share of the work by March or April this year.

Group Five’s energy business has recently been awarded the R4.6 billion engineer, procure and construct (EPC) Kpone Independent Power Project in Ghana by the Ghanaian Cenpower Generation Company for a 350MW gas- and oil-fired power plant.

Vemer said Group Five has successfully completed nine EPC power contracts to the value of R4 billion over the last seven years, with 40% of the value of the contracts executed in the rest of Africa.

The Investments and Concessions division contributed 7% of group revenue and almost half of core operating profit in the reporting period as its operating margin increased from almost 21% to 23%.

Vemer said Group Five hopes to grow its annuity income stream businesses in manufacturing and investments and concessions. He said the long awaited finalisation of the public private partnership (PPP) for the new headquarters of the Tshwane metro council is imminent as the council will meet in the next two weeks for final approval

The total secured engineering and construction order book stands at R13.3 billion. The group has further secured R4.7 billion in operations and maintenance contracts.

“The overall group reported order book therefore stands at R18 billion, compared to the R15.2 billion reported in November last year”, Vemer said.

“Looking forward to the next six months to the year end to June 2015, the group expects continued pressure on earnings due to ongoing slow local market order intake, restructuring costs in civil engineering, an ongoing higher percentage contribution from lower-margin building and housing and the impact of a later than expected commencement of the R4.6 billion Kpone Power Project. An improvement is expected in the group’s financial performance from F2016”, he said.

A dividend for the reporting period of 30 cents per share (H1 F2014: 45 cents) has been declared.

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