Commentary

INTRODUCTION

The weakness in the general domestic construction and engineering markets in which the Group operates has continued during the period, exacerbated by unpredictable delays in certain public infrastructure expenditure in South Africa as well as postponements in mining resource capital programmes.

In contrast to this, the African mining resources, power and energy sectors are recovering. The group’s emphasis on a larger geographic footprint for more of its business units in Africa has assisted all three construction segments in a small way to mitigate some of the domestic market weakness.

The Group continued to implement its conservative approach adopted last year in terms of both the quality of the order book and cash preservation to fund activity supporting future profit growth. It is thus encouraging to see a modest improvement in the construction order book, with the good cash position supporting this strategy.

However, the overall Group performance during the period was impacted by delayed construction revenue due to contract delays and client scope changes. Losses in Construction Materials, holding costs and losses from one previously reported contract in the Middle East also impacted results.

FINANCIAL PERFORMANCE

As per the cautionary announcement of 27 January 2012, based on the Group’s operational and strategic focus, as well as the poor outlook for the construction market in the South Gauteng region, the board of directors of Group Five resolved to dispose of the businesses that constitute the Construction Materials cluster. The Group is currently in discussions with several parties to effect these disposals. If successfully concluded, the disposals may have an effect on the price of the company’s shares. Accordingly, shareholders are advised to continue to exercise caution when trading in the company’s shares until a further announcement has been made.

The Group is therefore required to account for the Construction Materials operating cluster as a discontinued operation and Non-Current Assets classified as Held for Sale. Accounting practice requires the comparatives reported in this announcement to be restated to reflect the effect of the discontinued operations on those periods. The results are thus presented indicating the previously reported values and the restated amounts. The commentary below refers to the restated values only.

Headline earnings per share (HEPS) decreased by 48.2% from 251 cents per share to 130 cents per share and fully diluted HEPS (FDHEPS) by 44.2% from 233 cents per share to 130 cents per share. Earnings per share (EPS) improved from a loss of 354 cents per share to earnings of 89 cents per share in the current year and fully diluted EPS (FDEPS) improved from a loss of 354 cents per share to earnings of 89 cents per share.

Revenue from continuing operations decreased by 3.6% from R4,6 billion to R4,4 billion, mainly due to a reduction in activity levels within the civil infrastructure markets.

Operating profit, including fair value adjustments but before impairment adjustments, decreased by 40.5% from R368 million to R219 million. Fair value net upward adjustments of R49,9 million (H1 F2011: R10,4 million) were recorded during the period relating to the group’s interests in Eastern European service concessions and its interest in property developments. Operating profit before fair value adjustments and impairment adjustments decreased by 52.8% from R358 million to R169 million. Included within operating profit is a deficit on the group’s pension fund of R3 million in H1 F2011.

The group’s operating margins are reflected below. For comparative purposes, the Group provides both the total operating margin as well as the operating margin net of non-core/headline transactions of pension fund surpluses and deficits and profit/loss on sale or impairment of subsidiaries. The Group refers to the latter margin as the core operating margin, as it reflects the underlying operating performance. (The group discloses the numbers both including and excluding fair value adjustments in the table below).

Notes:

Total operating margin % is defined as operating profit before impairment adjustments as a % of revenue from continuing operations.

Core operating margin % is defined as total operating margin % adjusted for the non-core transactions listed above.

In line with expectations, net finance income of R1,9 million was recorded during the period compared to net finance income of R26,0 million in the prior period and net finance income of R19,8 million in H2 F2011.

The group recognised a tax expense of R65 million, mainly due to taxation from African jurisdictions with taxation rates higher than the South African corporate tax rate, as well as a conservative approach adopted to the raising of deferred taxation assets.

FINANCIAL POSITION

It is pleasing to note that the Group’s statement of financial position continues to be sound, with a nil net gearing ratio and bank balances and cash of R2,3 billion as at 31 December 2011.

The statement of financial position has been restated to reflect the required changes, accounting for Construction Materials as a discontinued operation, as outlined above.

During the prior year, the Group processed a gross impairment of R550 million in its Construction Materials business due to management concluding that the foreseeable market valuation of the aggregate and certain readymix assets was considerably less than the current carrying amount on the statement of financial position. This impairment was in addition to the gross impairment of R326 million taken at 30 June 2010. The prior year’s impairments and operating losses (net of taxation) are now reflected as discontinued losses in the prior reporting periods. No impairment to carrying value of these assets has been recorded in the current period under review. The current year’s discontinued loss represents both the operating losses from Construction Materials net of taxation, as well as an amount of R10,8 million (H1 F2011: R9,3 million) which was charged to the income statement, mainly as a result of the assessment of the amount due from contract claims on a terminated Indian toll road contract which continues through arbitration.

CASH FLOW

The group generated R236 million cash from operations before working capital changes (H1 F2011: R417 million) and generated R355 million from operations
(H1 F2011 R390 million utilised). The improvement in working capital was as a result of an increase in advance payments received and excess billings charged, as well as a corresponding decrease in work in progress balances.

DIVIDEND

The group’s adopted dividend policy is approximately four times basic earnings per share dividend cover. In line with this policy, a dividend for this period of 22 cents per share (H1 F2011: 52 cents) has been declared. The dividend policy therefore remains unchanged, based on the medium term business outlook and the availability of liquid resources.

BUSINESS COMBINATIONS

There were no business combinations in the period under review.

As mentioned above, the Group has resolved to dispose of its Construction Materials businesses. Construction Materials comprises sand and aggregates, readymix and extenders and mining crushing services.

The construction materials market in Gauteng where Construction Materials operate has remained heavily oversupplied with insufficient work being available to quarry owners who need to move quality materials at heavily discounted prices. Competitors with the benefit of an integrated offering through the value chain of cement, aggregates and readymix concrete and others with mobile crushing operations that locate from opportunity to opportunity have survived this extended downturn better than fixed quarry businesses.

Revenue for Construction Materials for the six months decreased by 20.3% from R241 million to R192 million, with a core operating loss of R31 million (H1 F2011: loss of R33 million). The loss on discontinuance is reported at R30,1 million (H1 F2011: R572 million).

Management has concluded that Construction Materials cannot be a core business for Group Five and will be sold. In this regard, the Group is engaging with parties who have expressed an interest in the various businesses and assets. It is acknowledged that there has been destruction in shareholder value in the Group’s venture into this market, with hard lessons learnt. This business has experienced unforeseeably historically low depressed markets and it would be costly for shareholders were the group to wait for a market recovery before exiting the business.

371 Rivonia Boulevard, Rivonia / PO Box 3951, Rivonia 2128, South Africa / Tel: +27 11 806 0111, 0860 55 55 56 / Fax: +27 11 803 5829 / Incorporated in the Republic of South Africa / Reg. no. 1969/000032/06 / JSE code: GRF / ISIN: ZAE 000027405

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