Wrecking ball hits home in construction sector
Group Five’s malaise is a symptom of bigger problems in the building industry, which has struggled to adapt to change
Shareholders who coughed up money for Group Five shares at the beginning of 2018 have virtually nothing to show for it.
The construction conglomerate has continued its slide because of pressure on margins, lower revenue and a lower order book.
Its market cap has shrunk from R4.9bn in September 2013 to R25.8m.
Those who saw value in Group Five — which operates in SA, some African countries and Eastern Europe — and pinned their hopes on its restructuring and rationalisation interventions have had their investments badly damaged: the share price has fallen more than 98% since January. That makes it an even worse performer than Steinhoff International, which has fallen 81%.
What went wrong?
For a start: not enough investment by the private sector and the government, which affected Group Five and its peers.
Esor Construction has filed for business rescue; its rescue plan is set to be finalised in February, according to its rescue practitioners. Basil Read and Aveng, former titans of the construction sector, are also struggling.
Construction companies have been unable to adjust since the infrastructure boom before the 2010 Fifa World Cup was followed by the global recession and lower domestic infrastructure investment, in particular capital expenditure by the public sector.
When the global economic crisis hit 10 years ago, Group Five lost contracts worth R4bn in Dubai. It hasn’t recovered from such setbacks.
Other than the macroeconomic environment, Group Five is also a victim of its own missteps.
Stephen Meintjes, head of research at Momentum Securities, points to the pursuit of growth outside SA.
He says taking on large projects in the rest of Africa comes with risks. "How many SA companies have paid school fees in the rest of the continent? Tiger Brands and Shoprite got burnt badly."
One factor looming large over Group Five’s performance in 2018 has been the Kpone independent oil and gas-fired plant in Ghana.
The engineering, procurement and construction contract, which Group Five won in 2014, contributed the bulk of the group’s R1.3bn net loss for the year to end-June.
In November, ratings agency Global Credit Rating (GCR) downgraded the company’s long-and short-term ratings. In its rationale for the decision, GCR cited the cumulative attributable loss to shareholders of R2.2bn in the two years to June 2018.
GCR has put Group Five, headed by Themba Mosai, on a negative outlook, saying there are significant downside risks, "particularly liquidity and reputational challenges facing the group … Further losses/erratic profitability due to [among others] weak contract execution, project disruptions, failure to secure contract awards timeously and/or failure to meet liquidity targets would further weaken credit protection factors".
Group Five’s rating will improve only if the firm returns to sustainable cash profitability on the back of a profitable order book, an extensive restructuring of operations and rigour of risk management protocols, says GCR.
Adding to its woes is the fact that Group Five’s client in Ghana, Cenpower, has filed an additional claim of $60.5m for its failure to complete the Kpone project on time.
This claim followed a previous claim to Group Five’s bank guarantee providers in November for $62.7m to be paid for contract delay damages at Kpone.
Ron Klipin, portfolio manager at Cratos Wealth, says there is no end in sight to Group Five’s woes. Klipin expects the company’s current financial year, which ends in June 2019, to be disappointing.
"The building and construction industry is still experiencing low levels of activity. This will result in shrinking order books [and] operating margin pressures, until after the elections when, hopefully, confidence should return," he says.
Still, Group Five’s share price doubled last Thursday to 48c from Wednesday’s closing price of 24c after it announced that it had attracted interest from numerous suitors.
"Shareholders are advised that Group Five has received expressions of interest from a number of parties for various parts of the group’s business," the company said.
Despite the dispute over its Ghana project and low levels of public infrastructure spending, perhaps there could be hope yet for the beleaguered Group Five.