Commentary

Introduction

Against on-going tough markets, the group continued to implement the conservative approach previously adopted in terms of both the quality of the order book secured and its philosophy towards cash preservation to fund activity which will support future profit growth.

It is thus encouraging to see an improvement in the Construction and Engineering & Construction (E+C) order book, with a good cash position supporting this strategy. The overall group earnings delivered during the period demonstrates an improved performance, over the comparable reporting period, with an increase in revenue traded, and an overall operating margin percentage increase. The earnings for the period are a consolidation of the following key factors:

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Pre-disposal operating losses, in line with forecasts and guidance provided, and a further R11,5 million cost to sell the remaining Construction Materials’ businesses.

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In Construction:

–	Contract losses (including overhead close out costs in line with forecasts and guidance provided) from the Middle East deflated an otherwise solid civils segmental performance
–	Weak domestic buildings market affected operating margins in this segment as guided
–	A solid performance was achieved by the Projects segment following continued strong activity in African mining resources

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Expansion in the Engineering and Construction cluster

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Robust earnings delivery from the group’s Manufacturing cluster

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Continued strong performance by Infrastructure Concessions with additional European toll collection contracts awarded in the period which offset delayed start-ups in African toll contracts

Financial Performance

Headline earnings (HEPS) of 152 cents per share represents an increase of 63.4%, and fully diluted HEPS (FDHEPS) of 151 cents per share an increase of 62.4%, compared to restated* HEPS and FDHEPS of 93 cents per share for the comparable reporting period. Earnings per share (EPS) was 140 cents per share and fully diluted EPS (FDEPS) 139 cents per share. This represents a 57.3% and 56.2% increase respectively over the 89 cents per share reported for H1 FY2012.

The difference between earnings and headline earnings is mainly as a result of an impairment charge of R11,5 million on assets, reflected as non-current assets classified as held for sale on the group’s statement of financial position, relating to the Construction Materials businesses being disposed of as described earlier.

Group revenue from continuing operations increased by 15.9% from R4,4 billion to R5,1 billion mainly as a result of increased activity in all of the group’s Construction businesses and the Engineering and Construction cluster.

Whilst profits from the Infrastructure Concessions and Building & Housing segments remained largely unchanged period on period, the increased operating profit generated by the Commentary Manufacturing cluster and the other Construction businesses resulted in the group’s core operating profit increasing by 18.4% and core operating margin percentage held at 5.1% (H1 F2012 5.0%).

* Restated to reflect operating losses from Construction Materials in headline earnings comparable with F2012 treatment.

In addition to this core operating profit is a surplus on the group’s pension fund of R12,0 million (H1 F2012: nil) as a result of an actuarial valuation assessment.

Fair value net upward adjustments of R29,1 million (H1 F2012: R49,9 million) relating to the group’s interests in Eastern European road transport concessions, positively affected the group’s results in the period under review. (H1 F2012: fair value adjustment included both Eastern European road transport concessions as well as the group’s investments in property developments and investment properties.) Group total operating margin increased to 5.3% (H1 F2012: 5.0%).

In line with expectations, group net finance costs of R6,2 million were recorded for the period compared to net finance income of R1,9 million in the prior period as a result of a period on period reduction in other finance income earned.

The effective tax rate of 31% (H1 F2012: 30%) was higher than the South African statutory tax rate of 28%. This was mainly due to a conservative approach adopted to the raising of deferred taxation assets, which was partially offset by liabilities in jurisdictions with lower taxation rates.

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 an increase in bank and cash balances to R2,6 billion as at 31 December 2012 (30 June 2012 R2,3 billion and 31 December 2011 R2,3 billion).

The statement of financial position continues to reflect the net investment in the Construction Materials businesses within non-current assets classified as held for sale. An impairment on the sale of non-current assets classified as held for sale of R11,5 million (net of tax), was charged against income in the current reporting period as mentioned earlier.

In addition to this impairment, the loss for the period from discontinued operations includes an operating loss (net of tax) from the Construction Materials businesses of R22,4 million (net of tax), as well as an amount of R4,1 million (net of tax) relating to legal costs incurred on a terminated Indian toll road contract previously disclosed.

Cash flow

The group generated R349,0 million cash from operations before working capital changes. In addition, it generated R229,8 million cash from working capital changes, resulting in a net cash inflow from operations of R497,3 million after settlement of taxation liabilities of R63,2 million. After a net cash investment of R115,5 million in plant and equipment, R52,2 million proceeds received on disposal of investment property and net repayment of liabilities of R68,6 million, the group generated an increase in cash of R372 million from continuing operations. The improvement in working capital was as a result of an increase in excess billings over work performed, as well as an improvement in trade receivables management and a decrease in work in progress balances.

Dividend

The group has previously disclosed that the company has adopted an approximate four times basic earnings per share dividend cover policy. This policy is subject to review on a semi-annual basis, prior to dividend declaration, as distributions will be influenced by business growth, acquisition activity, or movements in earnings as a result of fair value accounting adjustments. In line with this policy, a dividend for this period of 32 cents per share (H1 F2012: 22 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 during the current reporting period.

The group progressed with disposing of its Construction Materials businesses. At 30 June 2012 the group disclosed that it had concluded sale agreements on two of its Construction Materials businesses. During the current reporting period proceeds from these sales were received and an additional business sold. The group has received and accepted firm offers for the remaining assets held within the Construction Materials cluster. Implementation of these transactions mainly await the achievement of certain conditions precedent, which include Competition Commission approval and approval by the Department of Mineral Resources.

Shareholding

The early exit of the original BBBEE ownership transaction shareholder, Mvelaphanda, from the group’s ownership structure, along with the implementation of a Black Professionals Staff Trust and Izakhiwo Imfundo Bursary Trust, was approved by shareholders on 27 November 2012.

The transaction was concluded on 16th January 2013 following the fulfilment of all conditions precedent. The financial effects of the revised transaction will therefore be charged against income from H2 F2013. The estimate of the share-based benefit payment with respect to this transaction has been updated at the effective date. The share-based payment benefit provided to the Izakhiwo Imfundo Bursary Trust is recognised as a non-recurring equity settled share-based payment. The full estimated charge of R16,8 million (R12,7 million originally estimated as per the circular to shareholders) is recognised fully on grant date charged against. The estimated share-based payment benefit provided to employees through the Black Professionals Staff Trust is R93,9 million (R71,4 million originally estimated as per the circular to shareholders) and is recognised as a cash settled share based payment transaction over the life of the scheme from the effective date of this transaction to the assumed end date of November 2020 with an amount of R6,0 million estimated to be charged in H2 F2013 (R8,7 million originally estimated as per the circular to shareholders for the full year).

The implementation of the Izakhiwo Imfundo Bursary Trust portion of the revised transaction will result in an increase in the group’s number of shares in issue by two million shares from grant date. The implementation of the Black Professionals Staff Trust at the effective date resulted in no increase in the weighted average number of shares in issue. However this must be reassessed at each reporting period.

Industry matters

As announced on SENS on 1 February 2011, the group adopted a proactive stance from 2008 in respect of the on-going investigation by the Competition Commission into alleged anti-competitive behaviour within the construction industry. The group has continued to co-operate with the Commission for the last few years in the interest of determining if it had any exposure and to take advantage of the Commission’s leniency programme to limit the risk of any penalties and/or fines. The group has signed additional conditional leniency agreements with the Commission without penalty as it progresses its investigations. The group does not deem a provision for penalties and fines to be required and has subsequently not raised a provision in these reported results.