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The final big mistake that sank Group Five

Bad decisions around the construction of a power station in Ghana eventually took their toll.

It is difficult to say exactly when poor decisions and difficult conditions hit Group Five so hard that management had to announce to its shareholders that the group would be placed in business rescue.

Over the last 10 years the company has slowly faded away. Shareholders saw the share price fall from nearly R74 per share in 2007 to a mere 89c when they were suspended from trading on the JSE late on Tuesday morning.

Group Five: A slow demise

The announcement on the JSE’s Stock Exchange News Service (SENS) warned shareholders that there is only “a slim chance” that they will realise any value from their shareholding.

It is obvious that the contract to build a new power station in Ghana turned into a total disaster over the last two years and pushed Group Five to its limit. The final blow came last week when a consortium that previously granted bridging finance to the value of R650 million refused Group Five’s request to advance more credit.

This refusal was based on three factors: the consortium had already advanced considerable sums of money; another huge loan would not solve Group Five’s working capital requirements; and it seemed unlikely that the group would be able to pay back its existing debt given the state of its balance sheet and potential to earn sufficient profit.

The latest financial results show that the creditors are most probably right in their analysis. Group Five suffered a loss of R1.31 billion in the year to June 2018 compared to a loss of R773 million the previous year.

The cash flow statement shows that the group’s operations burned through R2.5 billion during the last two financial years.

Only two of the four reporting divisions were profitable during 2018 – Investments & Concessions earned an operating profit of R280 million and Manufacturing earned R70 million. The major losses were in the Engineering, Procurement and Construction cluster which struggled with the Ghana power station. The operating loss amounted to nearly R1.4 billion.

The annual report shows that management was desperate for cash.

The last few years were characterised by the selling of assets and even raiding the pension funds’ surpluses to the tune of nearly R100 million during 2017 and 2018. Directors’ remuneration halved in 2018 compared to the previous financial year.

But the problems surrounding the Kpone power station were too big and drained Group Five’s cash resources, as explained in the SENS announcement.

The discussion in the annual report about the gas- and oil-fired combined cycle power station in the Kpone district of the Greater Accra Region in Ghana makes for fascinating reading.

It seems all kinds of problems cropped up to delay the project – from a major change in project design (the power station uses only two types of fuel instead of three, as called for in the original design) and late delivery of equipment and building materials, to problematic engineering designs.

Impossible situation

When the power station was completed at the middle of last year, Group Five could neither test it properly nor commission it fully because the client failed to deliver fuel of the correct quality. The contract specified that the supply of fuel was the client’s responsibility.

And then things got really weird. Group Five announced late last year that its Kpone client had terminated the contract – with the power station basically complete. In addition, the annual report disclosed that the client “issued demands to the group’s bank guarantee providers demanding payment of the full value of bank guarantees in issue of US$106.5 million”.

The guarantee providers paid the total $106.5 million on the basis that the agreement stated: “that bonds must be separated from the contract and its related contractual claims and disputes, and therefore not on the merits of the contractual claims of the client.”

Unfortunately, Moneyweb could not get hold of Group Five management to discuss this issue, which seems to have been the largest single factor in the downfall of the once-promising construction group.

Some hope for parts of the business

Hopefully the business rescue practitioners, Metis Corporate Advisory, will be able to save big parts of Group Five and keep most of the 7 000 workers employed.

Metis founders David Lake and Peter van den Steen have been appointed as the business rescue practitioners and seem to have the right credentials. Lake offers experience in dealings in Africa, including the Ghanaian government, while Van den Steen holds a chemical engineering degree and an MBA, with experience dealing with a long list of distressed mining projects and companies.

At the end of the previous financial year, Group Five still had an order book of more than R10 billion. It seems likely that competent managers, engineers and business minded people can squeeze a bit of profit from that.

Unfortunately, Lake and Van den Steen will not have an easy task. The existing bridging finance of R650 million secured last year was guaranteed by a cession over Group’s Five best parts, namely the manufacturing cluster (largely Everite, manufacturer of Nutec building material) and the group’s interests in Europe (comprising maintenance contracts and road concessions).

Maybe the writing was already on the wall for Group Five, given the regular change in top management and executive directors during the last four or five years.

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COMMENTS   37

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Who will be next? Aveng?

The Ghana job was a setup. Someone is scoring a power station at a knockdown price.

What is new. Tell us something we don’t know.

This is Africa. African solutions to Africans problems.

Nice one Group Five! You self exterminated with no help from the ANC. Well done to the competent management.

Remember how you robbed this lovely country in 2010 WC contracts? You met your match in Ghana, they mugged you!

You may have a point. I worked for G5 and they were always a bit flaky, then arrogant from their dodgy share dealings in the 1980’s; recent ones may be instructive. More recently they were recommended by the SA agents of a large power equipment supplier as the “guys who know what is going on”. Even a cursory check showed that G5 were lightweight and inexperienced. The Ghana project may have confirmed this.

Good comments – the Ghana project did confirm just how unsophisticated G5 are/were. Talk about ‘eyes wide shut’!
It’s quite a joke just how many SA ‘big boys’ keep getting a klap when doing business in Africa. Here we have G5 basically building a power station for free, but what about Tiger in Nigeria and the fact that MTN is forever in hot water in Nigeria?

There’s the same problem with SA business going to Australia. Most of them get their clocks cleaned.
Woolies just being the latest one to have that experience.

It sounds like the Ghana thing is contestable.

under which jurisdiction? G5 were stupi! In Africa you do pay as you go, it’s unpredictable anything can happen anytime.

Trading at 2 to 3 cents a share now….I suspect Aveng is next.

makes one wonder who CR/ANC will use to rebuild the infrastructure if no construction companies are left?

New BBBEE construction companies. Do you see it yet.

Tiny BEEE companies are already being fast tracked off the ground to take their place…

Before building, say a carport on own property,a army of men will scrutinize the drawing to make sure it fit in with all requirements.

Building a power station is not comparable with a carport. Existing out of four poles with cover. Some authorities sees no difference.
From a distance they can look alike. Above the age of four, this look alike disappear by most. The remaining is set for a working life of inspections. For seeing a future product others not capable of.
This explain a lot.

Dude – What are you smoking.

Bas is an automated troll seemingly using some rubbish algorithm to generate nonsense replies to articles. Or he is smoking something strong.

Most concerning thing is the 6 likes!

All self votes, clearly. Time MoneyWeb woke up and added a “Dislike” button. Having only a “like” is like having a coin with only a Head.

It’s however so very sad that thousands could be without a job; more families left stranded and high and dry. What is going on in RSA for businesses is tragic to say the very least – more and more businesses folding or on the verge of folding. More and more sectors battling with more hands out.

South African construction companies with the support from Goverment and Labour could have help SA GDP accelerate to more than 3% and spear head into building Africa.

This is all very sad, these companies have now sacrificed their employees, the skills gained from multi generation tradesmen and their families.

Ask any senior foreman at Stefstocks, Group Five, Basil Read and M&R. Their sons and even daughter’s followed in their footsteps and now this is all gone.

These companies could have been in the Top 10 in the world instead this accolade goes to the Chineese.

World wide we are seeing the crash, Carillion in UK, M&R, Basil Read. Who next…

It’s radical economic transformation, intentionally.

Africa will burn South African companies that open up operations there….
Africa will burn you… Corporate South Africa go on and be stubborn, don’t ever say you were never warned. When will you learn?

Every year financial institutions like RMB give us reports that we are more likely to do well in the rest of Africa than back home.

Hence all these business are moving investments to broader Africa

Where is Antoinette Slabbert, now that we need her to know what REALLY brought Gr5 down?
Take us back thro 2 – 3 years of executive and director changes.
Did Gr5 actually screw up on the EPC of Kpone in Ghana, did they enter into a bad contract with weak guarantees, or did the Ghanaians simply mug them when it came to paying for a 97% finished job?

Normal way of doing business in Africa is to get a payment guarantee or upfront payments.

That’s what you get for working with an African Government. Getting screwed by them seems to be the norm nowadays, but when you want to trade in that area and want to have government contracts I guess you will have to accept that risk.

I do not see how they can come back. Government is pushing for small black owned construction companies to be at the forefront. It’s all over.

‘’Always be nice with people on your way up, because you’ll meet em on your way down’’
Wilson Mizner (1874-1933)
There was a time when most Bank’s Corporate Treasury Traders like me had to ‘’hurry up and wait’’ before we could arrange a meeting to see a decision maker (CEO, COO, CFO, Treasurer etc.) where we could discuss/propose a ‘’working capital’’ loans, trade solutions, letters of credit and guarantees, vanilla and derivative FX hedges etc. The days of prosperity has now finally come to an end for the Group of Five – prosperity after all, is the best protector of principle.
According to media reports the industries revenue (in 2007), for all construction companies was about R60-billion, and about R80-billion a year later. Fast-forward to 2015, and revenue was R144-billion, and R130-billion a year later. But in 2008, its net profit was around R6-billion — which dropped to R2.9-billion by 2016.

I fail to understand how the construction industry, in the years of fat, made no provision for the years of lean.

2008-2011, they started building contingency reserves left depleted by the dearth of construction work the previous 15 years. Then the Competition Tribunal fined them rather more than they had managed to accumulate in those few fat years, and also took a lien on any future profits.
How can anyone be surprised that M&R quit construction, Aveng is trying (without any prospect) to find a buyer for the wiped out LTA-Grinaker, Basil Read has gone to the wall, many others too numerous to list aswell .

Like Grp 5, Basil Read was driven by the construction drought being experienced by SA’s established Civils Contractors into areas unknown abroad, to keep its resources occupied. Their Ghana-Kpone was St Helena’s new airport, also a full-scope EPC job, wherein the customer cancelled the contract after construction was all but completed and the airport operational.
Only when SA’s “Construction Industry” is entirely in the hands of Black owners will an ANC government resume normal civils infrastructure spending.

“Only when SA’s “Construction Industry” is entirely in the hands of Black owners will an ANC government resume normal civils infrastructure spending.”

I am going to sleep…. Please wake me up when that has happened, ok.

Miss Management, what they were reporting was not what it was, a big cover for more then 12 years

I agree with PurgeCoin that this is indeed a very sad situation especially for their employees and the loss of the skills gained from multi generation tradesmen and their families. Several years ago, I had the pleasure of working with G5 in the DRC, despite my initial reservations the young team of enthusiastic site engineers and project managers delivered the project on time and to the required standard. This team with the support of their Johannesburg Office overcame the difficulties of working in a remote location and the logistic and material supply challenges that plagues and goes with the region. The experience gave me great hope and optimism for the future of the new South Africa and the new generation of engineers that companies like G5 were fostering. I do hope that David Lake and Peter van den Steen can rescue and resuscitate the key components of G5 to offer the much-needed opportunities to the likes of the great team I worked with as I know it can be done and successes can be achieved if both sides are fair and reasonable.

The company will disappear and reappear in new form. The fact is there’s still a need for construction and the work is done by employees not the company. If there’s work to be done, someone else will employ the people who actualy do the work and life goes on.

Group Five have been messing up for a very long time, this is not the first project in Africa were they have had problems with, furthermore the management that managed this project in Ghana, they them selfs were in-competent, having a track record of incompetency, not the first project that they have been kicked off, then you have to look at previous boards who have been miss reporting the figures to miss- lead the shareholders, particularly Middle East & Jordan, fabricating the No’s all along, I know because I worked for Group Five

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