Operational review

INTRODUCTION

The South African private sectors in which the group’s Construction businesses operate, namely mining, industry and real estate, remained weak. The timing of resumption in government infrastructure spending has been and will remain a key factor for the domestic South African construction industry. Although there is a planned capital investment in excess of R811 billion in public infrastructure spend and R40 billion identified in the PPP and concessions market for large public buildings and roads, as well as power developments, only a few significant awards have been made in the last four consecutive halves.

Whilst the group has focused on, and benefited from, the South African domestic public sector spend for the past two years, it has now returned to a more balanced portfolio of local domestic markets, with resumption in expanding international order books.

In this regard, there has been an increase in activity in the African power, energy and mining sectors in gold, copper, zinc, uranium and coal.

In the Middle East, the group continued to actively pursue new infrastructure opportunities, including power and heavy industry in an expanding number of countries. New contracts were recently won in Abu Dhabi, Jordan and Qatar. The resolution of the commercial closure of the two previously reported terminated contracts in Dubai is proceeding in an orderly fashion.

GROUP

The group’s operating margin is reported net of the following non-core/operational transactions: profit on sale of assets, disposal of subsidiaries, pension fund surpluses and deficits. The group’s operating margin, both including and excluding such adjustments, is reflected below.

* = core operating margin % is defined as reported operating margin % adjusted for the non-core transactions listed above.
• = reported operating margin % is defined as operating profit before fair value adjustments and impairment adjustments as a % of revenue.

INVESTMENTS AND CONCESSIONS

Investments and Concessions consists of Infrastructure Concessions and Property Developments. This cluster contributed 5.9% (2009: 5.9%) to group revenue.

INFRASTRUCTURE CONCESSIONS

This segment demonstrated a consistent performance, despite the continued effects of the deep recession and exceptionally poor weather across the European region. Although revenue decreased by 13.4% to R269 million (2009: R310 million), core operating margin improved to 16.4% (2009: 14.8%), with core operating profit largely unchanged at R44 million (2009: R46 million). Going forward, Eastern European and African concession opportunities are set to remain attractive, with further new projects under development in toll roads and power. The timing of awards in the South African buildings PPP market, however, remains uncertain.

PROPERTY DEVELOPMENTS

Although Property Developments did not generate positive returns during this financial year, its performance was in line with expectations, as the group continues its programme of disinvestment from the residential sector in favour of securing development and portfolio management positions in A-grade commercial and retail properties in South Africa.

Therefore, as expected, Property Developments’ revenue decreased by 43.1% to R14 million (2009: R24 million) and core operating profit reflected a small loss of R4,2 million (2009: R5,5 million loss).

MANUFACTURING

Manufacturing consists of building products business, Everite, as well as steel fabrication businesses. Manufacturing contributed 8.4% (2009: 8.0%) to group revenue.

Manufacturing limited the earnings decline in tough market conditions, with a solid performance from especially Everite and Group Five Pipe, which offset weaker construction steel markets.

Revenue decreased by 10.8% from R454 million to R405 million. Core operating profit decreased by 26.8% from R44 million to R32 million, resulting in a core operating margin of 7.9% (2009: 9.6%).

The results were achieved through continuous improvement in production techniques, an efficient supply chain, quick stock turns, product range extension and geographic expansion in Everite.

In the period under review, further progress was made in developing the group’s Advanced Building Technologies (ABT) product offering into the housing and building market.

CONSTRUCTION MATERIALS

Construction Materials comprises aggregates, readymix concrete and mining services. Construction Materials contributed 5.0% (2009: 4.7%) to group revenue.

In spite of aggressive cost reduction and process improvement measures taken, this cluster had to deal with the worst downturn for decades in the aggregates and readymix market. The asphalt, mobile crushing, sand and mining services operations have not been as materially affected. Unseasonally heavy rains also affected operations in the last quarter. Revenue for the six months therefore decreased by 10.5% from R269 million to R241 million, with a core operating loss of R33 million (2009: profit of R19 million).

As outlined above, the group has processed a further impairment due to the following factors:

Cyclical factors

Independent research confirms this down cycle as the most severe in decades. The dearth of workflow into the Gauteng construction sector has resulted in industry volumes and prices within the aggregates and readymix markets recently dropping substantially below the group’s most conservative forecast levels.

The aggregates and readymix markets have seen declines of 30 – 70% in volume and 10 – 40% in price from the peak of the market.

Fundamental structural factors

Current indications are that more than 150 million tons of waste dump rock could progressively enter the aggregates market as the Department of Mineral Resources is pushing for mines to rehabilitate old dumps. This alters the outlook for Construction Materials fundamentally. Cement producers, active in the readymix market, also continue to aggressively cut prices to protect cement powder volumes.

Recovery plans have been intensified to mitigate the significant adverse shift in the market. These include severely reducing output in line with demand, changing product mix, closing, selling, consolidating and relocating multiple sites and possible divestment of business units.

CONSTRUCTION

Construction comprises the business segments of Building and Housing, Civil Engineering and Engineering Projects. Engineering Projects incorporates the businesses of Projects and Engineering & Construction (E+C).

Construction continued to be the largest cluster in the group, contributing 81% to group revenue (2009: 81%).

As a result of good contract execution, the core operating margins remained strong and in line with expectations. The overall Construction core operating margin period on period improved from 6.4% to 7.4%. Although slightly down from the H2 F2010 Construction margin of 7.5%, this margin is pleasing in light of the group’s stated objective of maintaining a margin in excess of 5% in Construction.

Construction revenue decreased by 16.5% from R4,7 billion to R3,9 billion and core operating profit decreased by 2.6% to R288 million (2009: R296 million).

Over-border work contributed 25% (2009: 17%) to Construction revenue.

Building and Housing

In spite of the private building sector remaining extremely weak, Building and Housing managed to mitigate this impact through the contribution from some public sector contracts, as well as a focus on over-border opportunities, improved execution and supply chain savings.

Although revenue decreased by 21.7% from R1,6 billion (98% local) to R1,2 billion (79% local), core operating profit decreased by only 1.7% to R91 million (2009: R93 million), resulting in a strong improvement in the core operating margin to 7.5% (2009: 6.0%).

The strong results were achieved due to the completion of large contracts, as well as timeously and successfully focusing on the securing of new over-border and domestic contracts in public buildings and the educational and healthcare sectors.

During the period, the private sector property market remained weak, which was coupled with the slowdown in government’s promised infrastructure spend and delays in awards of certain PPP projects.

The secured one-year order book stands at R2,5 billion (64% local) (FY 2010: R2,6 billion and 78% local) and secured work at R3,8 billion (58% local) (FY 2010: R3,5 billion (77% local)).

Civil Engineering

Civil Engineering includes the group’s activities in South Africa, the rest of Africa and the Middle East.

Civil Engineering revenue decreased by 22.7% from R2,4 billion (82% local) to R1,9 billion (86% local). Core operating profit did well to reduce by only 9.3% from R143 million to R130 million, accompanied by a pleasing increase in overall core operating margin to 7.0% from 5.9% in the corresponding period and 6.4% in H2 F2010. This was due to successful execution and effective commercial management of large contracts in both the public and private sector.

Although tendering activity is high and increasing, awards are currently infrequent.

In the Middle East, the group continues to be conservative in its treatment of the cancelled contracts that continue to progress slowly to resolution. Geographical expansion in the region is progressing, whilst taking due cognisance of the risk imposed by the recent political unrest in the region.

Civil’s secured one-year order book stands at R2,2 billion (73% local), compared to R3,0 billion (85% local) as at 30 June 2010. The full order book is at R3,7 billion (51% local) (FY 2010 R3,8 billion (80% local)).

Engineering Projects

The Engineering Projects cluster incorporates the Projects business and the newly constituted Engineering & Construction (E+C) business.

A recovery in the African mining markets is underway. There was also some progression in the southern African power and energy markets over the past six months. During the period, revenue increased from R688 million (57% local) to R805 million (44% local), with core operating profit increasing by 11.6% from R60 million to R67 million. Core operating margin remained strong at 8.4% (2009: 8.8%).

The secured one-year order book stands at R1,4 billion (75% local), which is stable as compared to 30 June 2010 when R1,4 billion secured work (51% local) was reported. The full secured order book stands at R1,8 billion (81% local) (FY 2010: R1,9 billion (64% local)).

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