Commentary

INTRODUCTION

The period under review remained extremely volatile and unpredictable, with a slow recovery evident in international markets, particularly in African resources and Eastern European concessions, but a domestic market that is regarded as the worst in decades. Against these difficult markets, the group took a decision not to chase order book at the expense of cash and quality of work, but rather to look for better margin work outside of South Africa, preserve cash, cut costs rather than to carry them and not to fund low margin building contracts.

Whilst the group’s Construction, Manufacturing and Concessions businesses have performed well in light of these tough market conditions, further adverse cyclical and recent fundamental changes in the Construction Materials markets, particularly in the aggregates and readymix markets, have occurred. This resulted in the group taking a revised and more conservative view in terms of the future of this cluster and processing a further impairment, as outlined below.

FINANCIAL PERFORMANCE

Headline earnings per share (HEPS) decreased by 22.6% and fully diluted HEPS (FDHEPS) by 20.5%. Due to an impairment charge on property, plant and equipment (including intangible and goodwill assets) within the Construction Materials business, earnings per share (EPS) is a loss of 354 cents per share and fully diluted EPS (FDEPS) is a loss of 328 cents per share.

Group revenue decreased by 15.7% from R5,7 billion to R4,8 billion due to a reduction in activity levels within the buildings and civil infrastructure markets and the group’s decision not to chase volumes at the expense of margin. Revenue in Manufacturing and Construction Materials was also negatively impacted by adverse market conditions. These conditions, combined with increasing price competition, resulted in operating profit before fair value adjustments and impairment adjustments decreasing by 18.7% from R399 million to R324 million. The group operating margin decreased from 7.0% to 6.7%. Included within operating profit is a deficit on the group’s pension fund of R3 million. Excluding all non-core earnings adjustments, operating margin is 6.8%.

Fair value net upward adjustments of R10,4 million (2009: R10,4 million) were recorded during the period relating to the group’s interests in Eastern European service concessions.

In line with expectations, net finance income of R12,0 million was recorded during the period compared to net finance income of R7,6 million in the prior period.

The group recognised a tax expense of R94 million despite having a pre-tax loss of R204 million, mainly due to the effect of the limited taxation deduction on the Construction Materials impairment adjustment, secondary taxation on dividends paid and taxation from African jurisdictions with taxation rates higher than the South African corporate tax rate.

FINANCIAL POSITION

The group balance sheet continues to be sound, with a nil net gearing ratio as at 31 December 2010.

The group processed a gross impairment of R550 million (H2 F2010: R326 million) in its Construction Materials business due to management concluding that the foreseeable market valuation of the aggregate and certain readymix assets is now considerably less than the current carrying amount on the balance sheet. This impairment is in addition to the gross impairment of R326 million taken at 30 June 2010.

Furthermore, during the period, an amount of R9,3 million (2009: R10,6 million) was charged to the income statement, mainly as a result of a conservative treatment on the amount due from contract claims on a terminated Indian toll road contract, carried as a discontinued operation.

CASH FLOW

The group generated R462 million cash from operations before working capital changes. However, although in line with expectations, working capital absorption of R805 million resulted in a net cash outflow of R706 million in the period. As expected, the finalisation of the large local infrastructure contracts saw the unwinding of advance payments and the settlement of creditor final accounts. Pleasingly, working capital outflows are as a result of the settlement of trade and other payables only, whereas working capital continues to improve in all other areas of trade and other receivables and management of inventory levels.

DIVIDEND

The group’s adopted dividend policy is approximately four times basic earnings per share dividend cover. In recognition of the non-cash nature of the Construction Materials impairment adjustment, the board has approved a dividend based on a cover of approximately four times earnings per share of R2,07 before recording of impairment adjustments and pension fund deficits. An interim dividend of 52 cents per share (2009: 63 cents) has been declared. The dividend policy therefore remains unchanged, being based on the medium term business outlook, availability of liquid resources and the solid contribution from the group.

BUSINESS COMBINATIONS

There were no business combinations in the period under review.

SHAREHOLDING

Further to the group’s previous statement regarding the unwinding of the iLima Consortium (iLima) shareholding, the courts have awarded in Group Five’s favour and instructed the return of the group’s shares by iLima, currently delayed due to the liquidation of iLima. As previously reported, this unwinding will have no material bearing on the group’s results. The group has excluded the iLima shareholding from its current BBBEE scorecard and confirms that its scorecard has not been adversely affected. The group’s BBBEE status is currently a very competitive Level 2.

INDUSTRY MATTERS

As announced on SENS on 1 February 2011, the group has adopted a proactive stance in respect of the ongoing investigation by the Competition Commission into alleged anti-competitive behaviour within the construction industry. In 2008, the group took the lead and initiated an invasive internal investigation of its own. The group has co-operated with the Commission for the last two years in the interests of determining if it had any exposure and to take advantage of the Commission’s leniency programme to assuage the risk of any penalties and/or fines. The group believes it has no such exposure, although this cannot be guaranteed. The board of Group Five once again confirms its support for the Commission’s process, its commitment to assist the Commission in its objective to rid the sector of anti-competitive behaviour and reiterates its zero tolerance stance with respect to transgressions against compliance, ethics and integrity. In accordance with the Competition Commission requirements, the group cannot divulge any further detail about the process at this time.

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