Esorfranki Strengthens Order Book Even After Tough Year

Civil engineering and niche geotechnical group – Esorfranki - today announced weak results for the year to February 2011 that affirmed an extremely tough period for the group. Revenue fell 26,5% to R1,4 billion from R1,9 billion at the previous year-end and earnings dropped by 87% to R49,1 million. Esorfranki was hard-hit by the multiple challenges of a struggling construction sector, which were further exacerbated by unusually rainy weather and a number of exceptionally problematic contracts. Despite the adverse conditions the group proved its sustainability by ending the yearwith R1,9 billion secured work in hand and an additional R1,2 billion of pending awards about to kick off shortly. The group also began an overhaul of its operational structure during the year as part of a cost-cutting and brand enhancement initiative.

Depressed earnings reversed the prior year’s headline profit per share into a headline loss per share of 12,9 cents. Net asset value per share reduced by 13% to 238,86 cents. The group restructure incurred costs of R7 million, with loss-making contracts such as the N4 and Gautrain projects bleeding R90 million. In light of the poor performance Esorfranki declined to declare a dividend for the year. (The group had returned 15 cents a share to investors in FY2010.)

CEO Bernie Krone says he is pleased the group has survived the year of turmoil, albeit not unscathed. “Intensified competition and margin squeeze challenged every one of our resources, and saw all divisions across the board under-recover on overheads to push down profits.” He points to culprit conditions in the construction market such as increasing delays in contract awards, postponements and cancellations on existing work, unforeseen work obstructions on certain contracts, generally slow payments and bottlenecks on all public sector projects. He adds that the hiatus in the market following completion of the Soccer World Cup did not help matters.To further darken the picture of FY2011, he says Africa offered little respite with liquidity constraints hampering the release to market of new work and even progress on existing contracts.

Krone says: “We kept our nose to the grindstone and our eye on business basics to curtail the damage as far as possible.” Esorfranki consolidated all operations under one subsidiary, moved most personnel and plant into its head office premises and combined the plant of two divisions –Civils and Pipelines – under one company, exploiting all synergies and common administrative requirements to significantly lower costs. Capital expenditure was also reduced by almost 50% to R50 million and restricted to essential upgrades and maintenance.Post year-end in March 2011 a rights offer was finalised boosting the statement of financial position (balance sheet) with a R200 million cash injection. “We have used the proceeds to have bank covenants waived and to re-negotiate favourable facility requirements,” says Krone.

Going forward he says the group is cautious but positive, bolstered by major new contract wins expected to translate into an improved performance. The Civils division (formerly Patula) leads the group’s contracts pool with new roads projects across the country valued at more than R650 million, as well as another R200 million worth of work in the mining industry and a project in Mozambique. Around R90 million worth of new piling contracts has been awarded to the Geotechnical division (comprising Franki Africa and Esor Africa), with the Pipelines division holding an order book at year-end of R264 million. The relatively small order book was initially boosted in December 2010 when the group received a letter of intent for work on the Western Aqueduct. Krone says Esorfranki is still hopeful of a favourable decision in this regard from the appeals process which competitor bidders launched last year.To gear up for the new contract awards, capex in the year ahead has been approved at a higher R278 million.

Krone does not brighten considerably when talking of short-term prospects in 2011/early 2012. “We are expecting to see a more tangible uptick in trading conditions in the construction sector later in 2012 and more markedly in 2013,” he says, referring to the longer-term growth drivers of rising global demand for resources and infrastructure development in South Africa and Africa. “Optimistic GDP projections for South Africa from 2012 and for other African countries including Angola, Mozambique, Mauritius and Tanzania support more promising prospects in the medium- to long-term.”He says the group is expending all efforts to reach mutually acceptable resolution with the Competition Commission in relation to Esorfranki’s inclusion in a piling industry investigation mid-2009. To counter short-term challenges, Krone concludes that Esorfranki will continue leveraging its strengthened balance sheet, established reputation and Level 4 BEE advantage to keep securing work as it is released to market and to maximize profitability on all projects for an improved performance.


Issued by: Envisage Communications
 Nicole Katz/Michèle Mackey
(011) 325 5944/ 082 497 9827
On behalf of: Esorfranki Limited
Bernie Krone, CEO
(011) 882 3906/ 083 259 5984

Share Code: ESR

Issue date: 26 May 2011