Esorfranki Sustains Order Book To Soften Disappointing Results

JSE civil engineering group and leading geotechnical specialist, Esorfranki, endured a tough six months to August 2010 (“the period”) that saw macro-economic factors depress all key financial indicators. Despite the knock, the group has maintained a relatively healthy order book with R1,6 billion secured revenue in hand.Revenue for the period declined by 26,3% to R750,8 million.

Earnings reduced to R75,2 million from R235,6 million at August 2009. Headline earnings was down 90%, translating into the same drop per share to 4.1 cents. Cash generated from operations amounted to R58,7 million.CEO Bernie Krone attributes the group’s disappointing performance to trading challenges such as the slowdown during the 2010 FIFA World Cup and still sluggish business sector, and heavy rainfall in Gauteng in the first half of the period hitting contracts including the Gautrain, N4 and the R21 road project.
He says: “Performance during the period also reflects the struggling construction sector with fewer contracts coming to market, which is intensifying competition and eroding margins”.He adds that during the period sub-Saharan Africa offered no respite as markets there were also burdened by contract delays and cancellations. For Esorfranki the challenging conditions necessitated restructuring, which saw unfortunate retrenchments and added once-off costs to the group’s expenses.

Financial discipline in working capital management was a major focus during the period to contain the fallout from adverse market conditions. Krone says proactive reduction of debt saw gearing lowered to 34,1% from 35,6%. “Capital expenditure was tightly restricted and is now on hold while we ride out the economic storm.”Geotechnical, still the key contributor at 56,4% of group revenue, kept its decline in revenue to under 20% despite experiencing considerable setbacks. Krone highlights that roughly one-third of revenue was derived from foreign operations notwithstanding the difficult market in Africa and a stronger Rand during the period.

He points out that geotechnical contracts are short-term in nature and one of the first implemented on site, to the group’s disadvantage in down 
cycles. “Geotechnical work is often first-hit by a slowdown in contract progress, but importantly is conversely the first to benefit from an upswing.” He says that longer-term contracts in the remaining business units balance this to help build a sustainable, diversified revenue stream for the group.Heavy rain affected a number of Civils’ current projects and both this division and Pipelines felt the six-week disruption for the World Cup.

In a cost cutting initiative Pipelines’ and Civils’ offices and administrative support functions have been combined.While Krone expects the market to remain tough in the short-term, he says Esorfranki has a strong project pipeline in the immediate future. “In addition to R1.6 billion secured revenue on the books, we are shortlisted for more than R1 billion worth of projects.”

All business units have secured sizable anchor projects. “Geotechnical is entrenching its position in sub-Saharan Africa with landmark projects in Luanda and a significant pipe jacking contract in Gaborone,” says Krone.  Esor Africa is also working on a significant pipe jacking contract for a pipeline between Secunda and Sasolburg. 
Civils is currently working on a R400 million project for the Gauteng Freeway Improvement Project as well as the construction of a new eastbound carriageway of the N4 Platinum Highway, worth R124 million. Pipelineshas started Rand Water’s new BG3 pipeline, worth R200 million, which will carry water from the Vaal Dam to the Zuikerbosch pumping station. Civils and Pipelines collectively account for R900 million of secured revenue.

Looking ahead Krone is optimistic that Esorfranki will deliver some growth in the second half of the year to beat ongoing market obstacles. Of the longer-term, he says prospects are relatively positive. “There is still an overwhelming need for infrastructure development in power, water and roads so spending is inevitable, especially given government’s recently reiterated commitment to development.

With Africa offering a promising avenue for growth with prudent selection of regions, he concludes: “Market factors beyond our control may well scupper anticipated growth. However, we are looking forward to an improved second half of the year and beyond in light of initial signs of recovery and leading economic indicators pointing to this continuing.”

Esorfranki shares closed yesterday at R2.10 putting the company on a PE of 2.95

Issued by: 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 October 2010