Operational review

Group

For comparative purposes, the group provides both the group’s total operating margins, as well as the core operating margins from continuing operations as per the segmental report which is net of non-core/headline transactions such as 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. Both margins exclude the impairment of non-current assets, but include the fair value upward and downward adjustments on Investments and Concessions and profit/loss on sale of property, plant and equipment, as these are within the control of the cluster.

The group’s underlying businesses performed in line with management expectations and in accordance with the market guidance provided in November 2012.

As expected, the period’s results were impacted by losses in the Construction Materials segment, disclosed as a discontinued operation, as well as losses in the Middle East, reported within the Civil Engineering results.

Investments and concessions

Investments and Concessions consists of Infrastructure Concessions and Property Developments. This cluster contributed 6.6% (H1 F2012: 7.3%) to group revenue.

Revenue, which consists primarily of fees for the operation and maintenance of toll roads, increased by 4.5% from R320,3 million to R334,7 million. The core operating profit margin decreased from 27.8% to 22.6%, with core operating profit of R75,6 million (H1 F2012: R89,0 million), mainly as a result of fair value adjustments of R29,1 million recorded in H1 F2013 versus R49,9 million in H1 F2012.

Infrastructure Concessions

This segment demonstrated a strong performance despite the continued effects of the deep recession across the European region and the absence of new concessions awards in South Africa. In spite of South African policy uncertainty and delays in awards in domestic concessions and PPP activities and the economic pressures in Europe, Infrastructure Concessions performed ahead of expectations as a new tolling and operations contract came on line in Eastern Europe.

There has been progress on some of the delayed public sector building PPPs with some new projects under consideration. The Renewable Energy Independent Power Programme (REIPP) is running with Round one projects started and Round two preferred bidders announced. The outcome of the government’s deliberations on the resolution of the Gauteng Freeway Tolling impasse, the dispute over the N1-N2 Winelands concession and the work being done by the Presidential Infrastructure Coordinating Commission will be crucial in providing more clarity on the outlook for transport concessions. African concession opportunities remain attractive, with tolling on the Zimbabwe roads projects commencing shortly and further new projects under development in transport projects and power. The group was recently declared reserve bidder for the Mauritius Port Louis by-pass project.

Property Developments

The group continues to progress its strategy of disinvestment from the traditional residential sector in favour of securing A-grade commercial and retail property development positions with new projects starting in South Africa and some progress in West Africa in line with the group’s African strategy.

Manufacturing

Manufacturing consists of fibre cement building products business, Everite, as well as steel fabrication businesses BRI and Group Five Pipe. Manufacturing contributed 10.0% (H1 F2012: 11.3%) to group revenue.

Manufacturing produced pleasing results in a market where both traditional private and public sector conditions appear to have bottomed. The comparable reporting period includes closure costs of the steel fabrication business, which were incurred in the first half of H1 F2012.

Revenue increased 2.6% from R496,0 million in H1 F2012 to R508,6 million. The reported core operating profit for the year was R34,7 million. This was 60.8% higher than the prior year of R21,6 million, resulting in a core operating margin of 6.8% (H1 F2012: 4.4%).

An increase in volumes traded in Everite and BRI during the reporting period lifted the Manufacturing performance from the last reported results. Capacity in Everite has become a constraint in certain product groups, leading to accelerated capital planning. The modular housing systems business Advanced Building Technologies (ABT) is reflecting increased sales as the technology is accepted in more applications. Group Five Pipe remains tied to large water transport project demand, with improved project awards during the reporting period.

Construction

In prior years Projects and Engineering & Construction were consolidated into a single segment called Engineering and reported within the Construction cluster. With effect from 1 July 2012 the group was restructured with the Engineering & Construction business now reported as a separate cluster from Construction and the Projects business remaining as part of the Construction segment.

Construction continued to be the largest cluster in the group, contributing 75.5% to group revenue (H1 F2012: 73.9%).

Construction revenue increased by 18.5% from R3,3 billion to R3,9 billion and core operating profit increased by 24.9% from R111,3 million to R139,1 million. The overall Construction core operating profit margin percentage was 3.6% (H1 F2012: 3.4%). Over-border work contributed 37% (H1 F2012: 29%) to Construction revenues. Construction performance was impacted somewhat by end-of contract close out losses in the Middle East. The group purposefully continued to carry costs related to its investment in future opportunities and capacity building in local and new over-border transport and real estate PPPs, as well as geographic expansion.

Building and Housing

The private building sector remains extremely weak. The group has seen an increase in the volume of work coming to local market. Although underlying operating margins have not worsened, they remain thin. Building and Housing managed to partially mitigate this impact through the contribution of selected public sector building contracts, an improvement in the housing business, as well as improved execution and supply chain savings. However as guided in November 2012, this was not sufficient to prevent a decrease in operating margins.

Building and Housing revenue increased by 16.4% from R1,3 billion (80% local) to R1,5 billion (91% local). The segment reported a 9.2% decrease in core operating profit from the prior comparable period, from R33,4 million to R30,3 million. This resulted in the overall core operating margin percentage decreasing from 2.6% to 2.0%.

Government’s promised new infrastructure spend programme has not yet materialised. However there has been progress on some of the delayed public sector building PPPs with new projects under consideration. The coastal region performed well, although margins were constrained. In the short term the Building business will be under pressure while markets are further developed and while new awards against tenders under adjudication are awaited.

The Housing business has, however, seen a recent marked improvement in domestic mining and affordable and RDP housing work load.

The secured one-year order book stands at R3,9 billion (100% local) (F2012: R2,8 billion and 94% local) and total secured order book stands at R5,3 billion (100% local) (F2012: R3,6 billion and 95% local).

Civil Engineering

Civil Engineering includes the group’s civil engineering activities in South Africa, the rest of Africa and the Middle East. Civil Engineering reported a 19.9% increase in revenue from R1,2 billion (78% local) to R1,5 billion (61% local), while core operations reported a profit of R48,8 million for the period (H1 F2012: R31,8 million profit).

The Civil Engineering result was again impacted by revenue and margin shifting out in time due to delayed contracts as well as scope changes on several large South African contracts. The underlying South African and African Civil Engineering business delivered well on contracts executed in the period.

In the Middle East slow but positive progress continues to be achieved in contract resolution, including cash recovery. The good underlying Civil Engineering performance was, however, impacted somewhat by remnant costs incurred, as guided, and which relate to contractual and commercial resources managing contract finalisation and cash collection and less material close out losses on completed contracts.

Tendering activity is high and increasing, both locally and in Africa. The business is proactively mitigating domestic market conditions by progressively rebuilding its African order book in geographies in which the group has prior operating experience and where growth opportunities are stronger.

Civil Engineering’s secured one-year order book stands at R3,4 billion (54% local) (F2012: R3,3 billion and 43% local). The full order book is at R4,1 billion (53% local) (F2012: R4,4 billion and 43% local).

Projects

Projects continues to experience strong activity in sub-Saharan African mining resources markets, which resulted in new contract awards during the period under review. This trend is expected to continue as the business expands its experience in more minerals categories, technologies and geographies. In addition, cross-group co-operation continues as larger multidisciplinary projects become more prevalent.

During the period, revenue increased by 20.1% from R726,7 million (46% local) to R872,7 million (19% local). Core operating profit increased by 30.1% from R46,1 million to R59,9 million. The core operating profit margin percentage increased to 6.9% (H1 F2012: 6.3%)

The secured one-year order book stands at R1,3 billion (25% local) (F2012: R1,2 billion and 19% local). The full secured order book stands at R1,4 billion (26% local) (F2012: R1,8 billion and 37% local).

Engineering & Construction

The Engineering and Construction (E+C) business was established to deliver technology-based EPC, multi-disciplinary project management and construction, operations and services solutions to selected sectors such as Power, Oil and Gas and Water. The target markets have been slow to develop, although the demand in the long term is significant.

The group is encouraged by the private sector’s commitment to renewable energy. During the period the E+C business secured three full EPC power plant contracts in Wind and Solar for round 1 of the REIPP along with the long term operations and maintenance contracts on these plants. Round two REIPP prospects are developing positively.

The oil and gas business stream has seen an increase in its project and long term services order book.

During the period, revenue increased by 21.4% from R336,0 million (96% local) to R408,1 million (79% local). This resulted in a core operating profit margin of 2.6% (H1 F2012: loss) in line with expectations due to early stages of implementation of a number of projects.

The group purposefully continued to carry costs related to its investment in future opportunities and capacity building in nuclear readiness within the E+C business.

The secured one-year order book stands at R1,6 billion (89% local) (F2012: R1,0 billion and 71% local). The full secured order book stands at R2,6 billion (81% local) (F2012: R1,5 billion and 66% local).