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Johannesburg - Civil engineering and construction group Esorfranki [JSE:ESR] on Tuesday reported a 90% fall in diluted headline earnings per share to 4.1 cents for the six months ended August 2010 from 40.9 cents a year ago.
In line with the group's policy, no interim dividend was declared. The group reviews the dividend policy annually in light of cash flow, gearing, capital requirements and bank covenants.
The company said a host of factors had negatively impacted the results, including difficult trading conditions in the construction sector, inclement weather, intensifying competition and margin squeeze.
The disruptive effects of the Soccer World Cup on certain projects and the general lassitude in the wake of this event, further restricted top and bottom line growth, it said.
Revenue was 26.3% lower at R750.8m, while profit after tax declined 89.3% to R12.3m. Earnings before interest, tax, depreciation and amortisation (Ebitda) amounted to R75.2m compared with R235.6m a year ago. Cash generated by operations totalled R58.7m.
The company said protracted delays in the award of certain major contracts particularly affected Esorfranki Pipelines and Esorfranki Civils, while challenges in Sub-Saharan Africa reflected in the poorer performance of Franki Africa's East and West coast operations. However, this situation is expected to improve in the second half of the year as both delayed and new projects start to come on stream.
Operating margins came under pressure on some of the group's contracts due to lower activity levels in the industry overall.
Unfavourable weather conditions further exacerbated the situation, with excessive rainfall in the Gauteng region during the period. In addition Esorfranki incurred a once-off cost for restructuring initiatives.
Working capital cycles increased as a result of delayed collections from government as well as from main contractors in the Geotechnical business unit. This resulted in the group effectively borrowing a further R33m, by re-advancing previously paid-up facilities, to fund its working capital requirements.
In Africa the geotechnical market has not developed as anticipated and has been subjected to economic constraints similar to the rest of the world, the effect of which on Esorfranki has been compounded by the rand's strength, it said.
The rapid decline in contract awards, and consequently in group revenue, necessitated an immediate and extreme restructuring of both the KwaZulu-Natal and Gauteng geotechnical operations, resulting in nearly 600 retrenchments. A restructuring exercise has also been completed at Esorfranki Pipelines and Esorfranki Civils, with the offices combined into one premises using shared administrative support functions.
Looking ahead, the board remains positive of the group's growth prospects in the second half of the year notwithstanding prevailing market conditions, clients experiencing liquidity constraints and decline in demand continuing to result in project cancellations and postponements.
Esorfranki's order book stood at R1bn at end August, which includes R300m worth of orders to be completed in the 2012 financial year. The group is shortlisted for the award of a further R1bn of potential projects in the short term.
However, a number of adverse factors outside of Esorfranki management's control may continue to impact on these and other future opportunities, it warned. The factors include the non-award of tenders, ongoing funding constraints hampering client activity and increasingly tight competition.
In the long term general prospects are more positive, it believes.
The economy is slowly recovering and projects are likely to go ahead as spending is inevitable to facilitate positive annual GDP growth. This optimistic outlook is underpinned by government's reiterated commitment to infrastructure.
The need for considerable spending in certain sectors should drive work despite tough economic conditions, such as in water and sanitation, road infrastructure and power (the current infrastructure will reach the end of its efficient life cycle by 2020/25), it added.
The group plans to maintain its established presence across Sub-Saharan Africa to capitalise on growth opportunities in this region. Conditions in certain areas such as Mauritius and Mozambique are showing sustainable buoyancy, and while only comprising a small portion of Esorfranki's offshore revenue currently, these areas are growing healthily in contribution.
In line with the group's policy, no interim dividend was declared. The group reviews the dividend policy annually in light of cash flow, gearing, capital requirements and bank covenants.
The company said a host of factors had negatively impacted the results, including difficult trading conditions in the construction sector, inclement weather, intensifying competition and margin squeeze.
The disruptive effects of the Soccer World Cup on certain projects and the general lassitude in the wake of this event, further restricted top and bottom line growth, it said.
Revenue was 26.3% lower at R750.8m, while profit after tax declined 89.3% to R12.3m. Earnings before interest, tax, depreciation and amortisation (Ebitda) amounted to R75.2m compared with R235.6m a year ago. Cash generated by operations totalled R58.7m.
The company said protracted delays in the award of certain major contracts particularly affected Esorfranki Pipelines and Esorfranki Civils, while challenges in Sub-Saharan Africa reflected in the poorer performance of Franki Africa's East and West coast operations. However, this situation is expected to improve in the second half of the year as both delayed and new projects start to come on stream.
Operating margins came under pressure on some of the group's contracts due to lower activity levels in the industry overall.
Unfavourable weather conditions further exacerbated the situation, with excessive rainfall in the Gauteng region during the period. In addition Esorfranki incurred a once-off cost for restructuring initiatives.
Working capital cycles increased as a result of delayed collections from government as well as from main contractors in the Geotechnical business unit. This resulted in the group effectively borrowing a further R33m, by re-advancing previously paid-up facilities, to fund its working capital requirements.
In Africa the geotechnical market has not developed as anticipated and has been subjected to economic constraints similar to the rest of the world, the effect of which on Esorfranki has been compounded by the rand's strength, it said.
The rapid decline in contract awards, and consequently in group revenue, necessitated an immediate and extreme restructuring of both the KwaZulu-Natal and Gauteng geotechnical operations, resulting in nearly 600 retrenchments. A restructuring exercise has also been completed at Esorfranki Pipelines and Esorfranki Civils, with the offices combined into one premises using shared administrative support functions.
Looking ahead, the board remains positive of the group's growth prospects in the second half of the year notwithstanding prevailing market conditions, clients experiencing liquidity constraints and decline in demand continuing to result in project cancellations and postponements.
Esorfranki's order book stood at R1bn at end August, which includes R300m worth of orders to be completed in the 2012 financial year. The group is shortlisted for the award of a further R1bn of potential projects in the short term.
However, a number of adverse factors outside of Esorfranki management's control may continue to impact on these and other future opportunities, it warned. The factors include the non-award of tenders, ongoing funding constraints hampering client activity and increasingly tight competition.
In the long term general prospects are more positive, it believes.
The economy is slowly recovering and projects are likely to go ahead as spending is inevitable to facilitate positive annual GDP growth. This optimistic outlook is underpinned by government's reiterated commitment to infrastructure.
The need for considerable spending in certain sectors should drive work despite tough economic conditions, such as in water and sanitation, road infrastructure and power (the current infrastructure will reach the end of its efficient life cycle by 2020/25), it added.
The group plans to maintain its established presence across Sub-Saharan Africa to capitalise on growth opportunities in this region. Conditions in certain areas such as Mauritius and Mozambique are showing sustainable buoyancy, and while only comprising a small portion of Esorfranki's offshore revenue currently, these areas are growing healthily in contribution.
