12 November 2015 –JSE-listed construction company, Stefanutti Stocks, which operates throughout South Africa, sub-Saharan Africa and the Middle East with multi-disciplinary expertise in the construction industry, today reported a satisfactory set of results for the six months ended 31 August 2015. Willie Meyburgh, CEO of Stefanutti Stocks, said: “This is despite an extremely challenging trading environment, with management regularly reviewing and aligning each business unit and its respective divisions with the changes in their particular markets to ensure ongoing sustainability.”
Group financial overview
The company’s order book, consisting of mainly medium sized projects, stands at R12,5 billion, of which R4,2 billion arises from work beyond South Africa’s borders. Contract revenue from continuing operations remained unchanged from that of the previous year at R5,3 billion (Aug 2014: R5,3 billion).
Operating profit, excluding the fair value adjustment of R6 million, increased by 5% to R170 million (Aug 2014: R163 million). The operating profit margin from continuing operations improved slightly from 3,1% to 3,2%.
Adverse market conditions, reflecting in delayed payments and reductions in advance payments received from clients, saw an increase in interest bearing borrowings to R466 million (Feb 2015: R415 million), with an associated increase in the interest charged for the period. When compared with the prior period, it is the impact of the group’s finance costs, combined with an equity accounted loss of R9 million arising from the Middle East operations (Aug 2014: R4 million profit), that adversely impacted a consistent trading performance, resulting in the profit after tax reducing to R105 million from the R110 million reported in the prior period.
Earnings per share from continuing operations of 59,1 cents (Aug 2014: 62,3 cents) and diluted headline earnings per share from continuing operations of 49,5 cents (Aug 2014: 55,7 cents) decreased by 5,1% and 11,1%, respectively.
Capital expenditure for the period amounted to R52 million (Aug 2014: R134 million), of which R44 million was incurred for maintaining capacity.
A reduction in advance payments received during the six months to August 2015 resulted in cash generated from operations decreasing to R142 million from the R301 million reported at the last financial year end.
A decision was taken not to declare an interim dividend.
The group continues to report the Power business as a discontinued operation and the loss attributable to this discontinued operation for the period amounted to R9 million (Aug 2014: R21 million).
During the period the group decided to actively market its investment property, resulting in a re-classification of the fair value of the asset to non-current assets held for sale. The increase in the fair value of the investment property of R6 million is included in operating profit.
In the Structures business, contract revenue decreased to R1,1 billion (Aug 2014: R1,3 billion), with operating profit declining to R25 million (Aug 2014: R41 million). This is as a result of the significant reduction in infrastructure projects from both the government and private sectors. An operating profit margin of 2,3% from the 3,1% of the previous period, bears testament to the declining infrastructure market available to this business unit. Cost cutting measures are ongoing as the business aligns itself to market conditions. At August 2015 Structures’ order book was R1,9 billion (Aug 2014: R2,3 billion).
The Roads, Pipelines & Mining Services (RPM) business unit continues to perform well but in an increasingly competitive market. This has resulted in contract revenue remaining constant at R1,5 billion (Aug 2014: R1,5 billion) but operating profit reducing to R100 million (Aug 2014: R118 million), with a consequent reduction in the operating profit margin from 8,1% to 6,5%. RPM continues to experience delays in contract awards. While the R1,0 billion Bottom Road project in Zambia, awarded almost a year ago, commenced in October 2015 after the receipt of the advance payment. The recent weakening of the Zambian Kwacha against other currencies, may negatively affect this project’s profitability. RPM’s order book at August 2015 was R5,0 billion (Aug 2014: R5,0 billion).
Although trading conditions in the building sector remain competitive, the Building business unit reported an operating profit of R10 million (Aug 2014: operating loss of R21 million), excluding the fair value adjustment. Contract revenue of R2,1 billion is the same as that reported in the prior period. These results exclude the results of the equity accounted Middle East operations. Overall the cross-border operations contributed positively to the business unit’s performance, with Mozambique generating the majority of the returns. As a result of the loss incurred by Zener Steward, the combined Middle East operation has posted an operating loss of R8,5 million for the period (Aug 2014: profit R3,8 million). Corrective action is being taken with respect to Zener Steward. Building’s order book at August 2015 was R4,0 billion (Aug 2014: R4,3 billion). Potential awards are imminent, which should improve the financial position for the following year.
The Mechanical & Electrical (M&E) business unit delivered good results and continues to grow on the back of available petrochemical projects. Contract revenue and operating profit increased to R560 million (Aug 2014: R336 million) and R33 million (Aug 2014: R23 million), respectively. The order book at August 2015 was R1,1 billion (Aug 2014: R0,9 billion).
As previously reported, the company has received legal notification for two matters arising out of the Competition Commission Fast Track Settlement Process in 2013. The first matter relates to a complaint initiated by the Competition Commission into an alleged “World Cup Stadia Meeting”, which has been 3 referred to the Competition Tribunal for adjudication. Stefanutti Stocks has been cited as one of the respondents. The second matter relates to a civil damages claim initiated by the City of Cape Town in respect of the Green Point Stadium, following the findings and the imposition of administrative penalties by the competition authorities. Stefanutti Stocks has been cited as one of the defendants.
Meyburgh stated: “We are confident that on the facts currently available we will be able to successfully defend the above two matters and accordingly have not made any provision for these. “
In conjunction with 14 other contractors, Stefanutti Stocks also received notice from the Construction Industry Development Board of its intention to launch a formal inquiry regarding the contractor’s conduct that gave rise to the penalties imposed by the Competition Commission. This process is currently being challenged.
Meyburgh concluded by saying that given the exceptionally low levels of business confidence in most of the private sector, and reduced capital expenditure in the government sector, the local construction market continues to be extremely challenging. “The high levels of competition for available work may negatively impact operating profit margins going forward. However, we are of the view that potential growth prospects exist in certain sectors of the economy, which provide opportunities for our Roads & Earthworks, Building, Oil & Gas and Electrical & Instrumentation operations.”
In other sectors, the group is well positioned to take advantage of the medium-sized projects coming to the marketplace to maintain the order book. ”Our multi-disciplinary and geographically diversified business structure provides a robust platform on which the group is able to position itself as a strong competitor in the southern African construction market. We will also continue to look for opportunities both in southern Africa and on a more selective basis further afield in sub-Saharan Africa.”