Wrap Text
Reviewed Condensed Consolidated Interim Results for the Six Months Ended 31 August 2016
Esor Limited
(Registration number 1994/000732/06)
Incorporated in the Republic of South Africa
(JSE Code: ESR ISIN: ZAE000184669)
("Esor" or "the company" or "the group")
Reviewed condensed consolidated interim results for the six months ended 31 August 2016
Highlights
Profit up 21,7% to R7,5 million
HEPS up 6,8%
Gearing reduced to 13,8%
Post period acquisition of Tuboseal
Commentary
Introduction
The reviewed condensed consolidated results for the six months ended 31 August 2016 ("the current
interim period") reflect Esor's continued efforts in building a strong balance sheet base for future
growth and continued the momentum of profitability for a third successive period. The restructure of
the group into two core operational divisions - Esor Construction, which is further sub-divided
into the geographical areas of Inland (based in Johannesburg and Polokwane), East Coast (based in
Durban), West Coast (based in Cape Town) and African operations (based in Harare); and Esor
Developments, has streamlined operations and enabled management to better focus and capitalise
on existing expertise and footprint. Operations are supported by Shared Services based in
Johannesburg.
Revenue was 13,8% lower when compared to the previous corresponding interim period and was
impacted by various project delays caused by community unrest, specifically around the Vuwani and
Steelpoort areas where three months' production was lost during the run-up to the local elections,
and by deploying adequate resources in the ongoing efforts to address quality issues on the Northern
Aqueduct project.
Esor's work on hand at R1,4 billion remains largely dependent on government, municipal and parastatal
work.
Post the current interim period, Esor concluded the acquisition of the entire share capital of Tuboseal
Services Proprietary Limited and the business assets and operations from Tuboseal Proprietary Limited
(collectively "Tuboseal") (see "Acquisition" below) further expanding the company's service offering
and geographic reach.
Financial results
Revenue was down 13,8% to R666,3 million (2015: R772,5 million). Notwithstanding the lower revenue,
profit increased by 21,7% to R7,5 million (2015: R6,2 million). Basic earnings per share grew 24,2%
to 2,05 cents while headline earnings per share increased 6,8% to 2,15 cents (2015: 2,01 cents).
Profit for the current interim period was positively impacted by achieving improved productivity at the
Kusile site following the introduction of a night shift with limited disruptions and adequate access.
This was largely off-set by further losses at the Northern Aqueduct due to additional repair works and
resultant extended completion date.
Cash flow remained under pressure given the additional costs incurred on the Northern Aqueduct,
non-resolution of a number of claims and delayed payments from municipalities and water authorities.
Cash on hand at period-end was R18,5 million (2015: R40,5 million).
Safety
The company's adherence to a zero harm approach reflected in an improved 12-month rolling lost
time injury frequency rate ("LTIFR") for the period of 0,38 (2015: 0,59). Esor remains ISO 9001,
14001 and OHSAS 18001 accredited and is currently in the process of integrating the requirements
of all three standards into a single group policy and procedure document. In addition, the company
has reduced its LTIFR threshold level from 0,4 to 0,28 setting a target which is in line with best
practice.
Review of operations
Esor Construction
A number of factors adversely impacted the operating environment including community unrest causing
project delays, a generally tough macro-economic landscape and increased legal challenges regarding
the fairness of tender awards.
The overall tendering and contracting environment remained extremely competitive with a number
of larger pipeline contracts coming to the market over the last six months.
Repair work of the quality issues identified at Northern Aqueduct during the first six months of
the 2016 calendar year is ongoing and expected to be completed during December. One sector has been
tested and passed with a further two sectors currently undergoing testing. It is expected that the
construction work and testing will be completed by the middle of December 2016 and the works handed
over and the team off site by the end of February 2017. A loss of R59,8 million was recognised
during the previous financial year ended 29 February 2016 and an additional loss of R31,4 million
has accumulated during the current interim period. This represents the full loss to completion in
February 2017 as repairs are nearing completion.
The company has submitted a number of insurance and contractual claims in pursuing further
compensation from the specialist sub-contractor and employer. None of the insurance claims
has been recognised although Esor and its legal team remain confident that the cost of repairs
will be recovered under the relevant insurance contract.
The balance of the pipelines contracts is performing to expectation and includes four projects
in Limpopo, the Western Aqueduct in KwaZulu-Natal as well as smaller to mid-sized projects in
Gauteng. The Swaziland contract is nearing completion and provisional acceptance was obtained
on 15 September 2016.
The continued lack of new major infrastructure works is still impacting Esor's ability to
secure additional works and grow in the sector. To this end, we have managed to secure new
mining infrastructure work and are also in final negotiations to secure further work in
this sector.
The Kusile power station contracts remain the anchor projects and continue to perform
strongly with Package 25 nearing completion. All claims on this package have been
successfully resolved and the project is profitable. We are still in the final phases
of negotiations on resolving the Package 26 claims that should be finalised by the end
of this calendar year. We have recognised revenue to the value of R105 million against
these claims in the previous financial year, and to date we have received R60 million as
an interim payment against the claims.
Fierce competition in the pipejacking market has resulted in reduced revenue for the six
months under review. We continue to be the market leader with a track record in excess of
30 years.
Pipejacking has been fully consolidated into the geographical footprint of the group with
contracts in five provinces as well as Botswana. The longer term contracts are the O6
pipeline for Rand Water which is nearing completion as well as the 110 metre jacks at
Steelpoort for Basil Read. We are currently in negotiations with Basil Read on claims
regarding the Steelpoort contract that has had a R35 million negative effect on cash
flow. A number of opportunities exist both within South Africa and Botswana that once
secured will result in a full order book for the next six months.
The integration of Tuboseal, a company rendering specialist trenchless rehabilitation
solutions and based in Cape Town, which was acquired effective 1 September 2016, is in
progress, with the positive impact expected in the second half of the 2017 financial
year (see "Acquisitions" below).
Esor's building and housing efforts remain focused on commercial and retail refurbishments
as well as the construction of the lower end of the housing market. Competition for projects
remains fierce in a competitive environment marked by very low margins. Esor has remained
selective in the tendering for new work resulting in a reduction in work on hand. There are
a number of housing opportunities being priced that may be finalised and awarded by the end
of the calendar year.
Esor Developments
Esor remains focussed on identifying the right opportunities which fit its strategy with
the aim of growing its portfolio on a considered and selective basis.
The Orchards development remains on track and the final extension will be ready for
proclamation and registration by January 2017. The only remaining opportunities will be
the two commercial sites that are available for development.
The affordable housing project in Khayelitsha is awaiting the final administration step
of land registration. A total of 368 serviced stands are available for development, with
a number of sales in place following the registration as well as a further 1 000
opportunities to be serviced and developed.
Uitvlugt is in the final phases of township planning and layout that will be followed
by environmental applications and approvals and will ultimately consist of 16 smaller phases.
This will ensure the viability of the development but may take 12 months to come to market.
All environmental issues at Diepsloot have been resolved and we are confident that the bulk
infrastructure work will commence before financial year-end.
Africa
Africa continues to present numerous growth opportunities. Our Swaziland project is on
track and due for imminent completion following the provisional acceptance by the client
on 15 September 2016. Botswana continues to be a growth area with further pipejacking work
being secured in the Thune district. Projects ex-South Africa provide a foreign currency
hedge, which is favourable when the rand is weakening, and potentially offer higher margins
after taking the associated risks into account. Opportunities in Zimbabwe and Zambia
continue to be explored with a number of smaller piling contracts being completed in
Zimbabwe and the Old Mutual piling contract in Harare being secured which commenced in
November 2016. The Zambian efforts have not yet translated into orders.
Competition Commission
Negotiations with the Competition Commission are ongoing in relation to the Tribunal
inquiry into the 2009 complaint of collusive tendering practices in the geotechnical
exploration and investigation works.
CAPEX
Capex for the six-month period totalled R7,8 million (2015: Nil). Esor's reinvestment in
plant and equipment has been subdued in the past three years but it is critical to manage
the average age of its fleet and replace ageing capital equipment. An order for new excavators
has already commenced. Critical and specialised items are being evaluated and a replacement
plan has been put in place.
Transformation
Following a BEE scorecard assessment in terms of the new Revised Codes of Good Practice, Esor
has maintained its Level 3 B-BBEE accreditation.
The Esor Broad Based Share Ownership Scheme ("EBBSOS") holds a 5,32% stake in the company.
A number of strategies are already in place to drive further transformation within and
across the group from employment practices to internships and enterprise development initiatives.
Following the issue of the new Construction Charter, currently open for comment, management and
the board will review and adapt our transformation strategy where required.
Directorate
Keneilwe Moloko retired by rotation as a director and did not stand for re-election at the annual
general meeting on 24 June 2016. The board thanks her for her contribution during her tenure and
wishes her well for the future.
Reneiloe Masemene was appointed as an independent non-executive director effective 19 August 2016.
She is an attorney with extensive experience in mining, labour law and corporate finance and serves
on the Social & Ethics and Remuneration & Nomination committees. The board welcomes her and
looks forward to working together to grow the group.
Prospects
The current challenging market conditions are not expected to change in the short term.
Nonetheless, Africa and specifically the SADC countries offer good growth prospects. We are
currently completing nine pipejacks in Botswana with the possibility of additional works and
are commencing with our largest piling job in Harare, Zimbabwe for Old Mutual. We also continue
to actively tender in Swaziland and Zambia.
Work on hand has decreased marginally to R1,4 billion compared to R1,6 billion for the
comparative period. However, there are a number of imminent outstanding awards which could
positively boost the order book to R2,5 billion. Cash conversion rates from this pipeline
will remain a challenge taking into account the secured margin and commercial terms.
Dividend declaration
In line with group policy no dividend has been declared (2015: Nil). It remains the policy of
the group to review the dividend policy annually in light of cash flow, gearing, capital
requirements and bank covenants.
Events after the reporting date
Acquisition
As announced on SENS on 10 October 2016, Esor acquired the entire share capital of Tuboseal
Services Proprietary Limited and the business assets and operations from Tuboseal Proprietary
Limited (collectively "Tuboseal") for R15 million and R18,25 million, respectively. The
acquisition complements Esor's existing water-focused and pipeline business and secures
annuity and maintenance income, while marking Esor's entry into the Western Cape. The niche
business adds an additional service offering in trenchless specialist pipeline rehabilitation
with over 100 000 metres of pipe cracking and over 30 000 metres of pipe renewal by CIPP
(cure in pipe process). Tuboseal is able to assist municipalities in ascertaining their
rehabilitation needs and priority areas in water and sewer reticulation systems. From
Tuboseal's perspective the acquisition provides access to Esor's extensive geographic
footprint to expand beyond its current home market in the Western Cape.
The acquisition was effective from 1 September 2016.
Mandatory offer and rights offer
Post the current interim period, our strategic investor, Geomer Investments Proprietary
Limited ("Geomer"), increased its holding in the company to 42,46% (net of treasury shares)
triggering a mandatory offer to shareholders. As an existing shareholder with whom we had
been exploring possible synergies in the water and sanitation space, we believe Geomer's
support will prove positive to the growth of the company.
Geomer has further provided funding for the acquisition of Tuboseal and is fully
underwriting the proposed rights offer to shareholders which will follow the mandatory
offer in January 2017. Esor anticipates that the proposed rights offer will comprise
98 796 357 shares at 38 cents each (see SENS announcements of 21 and 26 October 2016,
respectively, for further details).
Statement of compliance
The condensed consolidated interim financial statements are prepared in accordance
with International Financial Reporting Standard, ("IAS") 34 Interim Financial Reporting,
the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and
Financial Pronouncements as issued by Financial Reporting Standards Council and the
requirements of the Companies Act of South Africa. The accounting policies applied in
the preparation of these interim financial statements are in terms of International
Financial Reporting Standards and are consistent with those applied in the previous
annual financial statements.
The financial statements for the current interim period were prepared under the
supervision of Bruce Atkinson, Esor's financial director.
Auditor's independent review
These interim condensed consolidated financial statements for the period ended
31 August 2016 have been reviewed by KPMG Inc., who expressed an unmodified review
conclusion. A copy of the auditor's review report is available for inspection at
the company's registered office together with the financial statements identified
in the auditor's report.
Appreciation
We thank our management and staff for their continued hard work and dedication during
trying times and in sometimes extreme circumstances. Our appreciation also goes to our
fellow directors for their wise counsel and our business partners, suppliers, advisors
and valued clients as well as shareholders, notably Geomer, for their loyal support.
On behalf of the board
Bernie Krone
Chairman
Wessel van Zyl
CEO
24 November 2016
Condensed consolidated statement of financial position
Reviewed Reviewed Audited
31 August 31 August 29 February
2016 2015 2016
R'000 R'000 R'000
ASSETS
Non-current assets 409 135 457 168 404 539
Property, plant and equipment 174 774 208 786 178 381
Goodwill 112 091 155 323 112 091
Financial assets at fair value through profit or loss 51 228 29 488 51 228
Deferred tax asset 10 173 11 805 10 186
Investment and loan to joint venture 60 108 51 005 51 892
Loans and long-term receivables 761 761 761
Current assets 673 298 656 073 696 386
Loans and receivables 37 428 37 619 35 428
Inventories 127 435 127 222 108 075
Non-current assets held for sale 9 500 - 9 500
Taxation 8 928 2 692 15 552
Trade and other receivables 471 474 448 003 485 409
Cash and cash equivalents 18 533 40 537 42 422
Total assets 1 082 433 1 113 241 1 100 925
EQUITY AND LIABILITIES
Share capital and reserves 668 411 673 420 669 102
Share capital and premium 581 014 582 381 581 014
Equity compensation reserve 72 - 72
Foreign currency translation reserve 19 568 16 040 27 756
Retained earnings 67 757 74 999 60 260
Non-current liabilities 74 422 110 100 72 968
Secured borrowings* 44 576 83 984 45 726
Preference shares* - 5 000 -
Deferred tax liabilities 29 846 21 116 27 242
Current liabilities 339 600 329 721 358 855
Current portion of secured borrowings* 57 508 58 116 55 093
Current portion of preference shares* 5 250 5 239 10 605
Financial liability at fair value through profit or loss - - 5 843
Taxation - - 714
Provisions 6 452 12 813 17 040
Trade and other payables 270 390 253 553 269 560
Total equity and liabilities 1 082 433 1 113 241 1 100 925
Net asset value per share (cents) 183,2 182,3 183,4
Tangible net asset value per share (cents)** 161,0 152,0 161,2
* Interest-bearing debt.
** (Net asset value less intangible assets net of deferred tax)/issued shares at period-end.
Condensed consolidated statement of comprehensive income
Reviewed Reviewed
six months six months Audited
ended ended year ended
31 August 31 August 29 February
2016 2015 Change 2016
R'000 R'000 % R'000
Revenue 666 286 772 551 (13,8) 1 435 901
Cost of sales (645 038) (721 088) (10,5) (1 353 798)
Gross profit 21 248 51 463 (58,7) 82 103
Other income 20 601 10 876 89,4 52 589
Operating expenses (18 731) (32 760) (42,8) (52 899)
Profit before interest, tax,
amortisation, impairments
and depreciation 23 118 29 579 (21,8) 81 793
Depreciation, impairments
and amortisation (10 640) (16 385) (35,1) (78 016)
Results from operating activities 12 478 13 194 5,4 3 777
Finance income 1 451 4 445 (67,4) 12 577
Finance costs (2 029) (6 880) (70,5) (9 851)
Profit before tax 11 900 10 759 (10,6) 6 503
Taxation (4 403) (4 599) 4,3 (2 820)
Profit for the period 7 497 6 160 (21,7) 3 683
Other comprehensive income:
Foreign currency translation
differences for
foreign operations 10 497 (1 627) (745,21) 933
Income tax on other
comprehensive income (2 309) 358 745,21 (210)
Other comprehensive income for
the period, net of tax 8 188 (1 269) 745,21 723
Total comprehensive income
attributable to:
Owners of the company 15 685 4 891 220,7 4 406
Basic earnings per share (cents) 2,05 1,65 24,24 1,0
Diluted earnings per share (cents) 1,98 1,65 20,00 1,0
Reconciliation of headline earnings
Profit attributable to ordinary
shareholders 7 497 6 160 22 3 683
Adjusted for:
Loss on disposal of property, plant
and equipment 337 1 371 (75) 2 678
Impairment of investments
and goodwill - - - 47 108
Headline earnings attributable
to ordinary shareholders 7 834 7 531 4 53 469
Number of ordinary shares in
issue ('000) 395 185 395 185 395 185
Diluted weighted average 378 730 374 096 378 996
Weighted average 364 941 374 096 370 506
Headline earnings per share (cents) 2,15 2,01 6,8 14,4
Diluted headline earnings per
share (cents) 2,07 2,01 2,8 14,4
Condensed consolidated statement of cash flows
Reviewed Reviewed
six months six months Audited
ended ended year ended
31 August 31 August 29 February
2016 2015 2016
R'000 R'000 R'000
Cash flows from operating activities
Profit before taxation 11 900 10 759 6 503
Adjustments for:
Depreciation of property, plant and equipment 10 640 16 385 30 909
Impairment of goodwill - - 43 232
Impairment of loans and receivables - - 3 876
Amortisation and fair value adjustments of
financial assets - - (15 897)
Loss on disposal of property, plant and equipment 531 1 904 3 718
Foreign currency adjustment (7 995) (4 573) 771
Equity-settled share-based payment transactions - - 72
Net finance costs (2 803) - (5 548)
Income tax refund/(paid) 4 124 (1 793) (4 625)
16 397 22 682 63 011
Change in inventories (19 360) 22 152 41 299
Change in trade and other receivables 6 092 56 327 18 921
Change in trade and other payables 7 282 (68 566) (52 559)
Change in provisions (17 040) 1 355 5 582
Net cash (used)/generated from operations (6 629) 33 950 76 254
Cash flows from investing activities
Proceeds from sale of property, plant and equipment - 26 804 35 295
Loan advanced to joint venture (5 413) - -
Acquisition of property, plant and equipment (7 757) (2 050) (6 663)
Net cash (used)/generated from investing activities (13 170) 24 754 28 632
Cash flows from financing activities
Proceeds from the issue of share capital,
net of expenses
Increase/(decrease) in secured borrowings 1 265 (42 657) (83 938)
Preference shares redeemed (5 355) (10 500) (12 149)
Shares acquired - (1 349) (2 716)
Net cash used in financing activities (4 090) (54 506) (98 803)
Net decrease in cash and cash equivalents (23 889) 4 198 6 083
Cash and cash equivalents at beginning of period 42 422 36 339 36 339
Cash and cash equivalents at end of period 18 533 40 537 42 422
Condensed consolidated statement of changes in equity
Equity
compen-
Share Share sation
R'000 capital premium reserve
Balance at 1 March 2015 374 583 356 -
Profit for the period - - -
Other comprehensive income
Foreign currency translation differences
for foreign operations - - -
Total other comprehensive income - - -
Total comprehensive income for the period - - -
Transactions with owners, recorded directly
in equity
Contributions by and distributions to owners
Shares acquired (5) (1 344) -
Foreign currency translation differences
transferred to retained earnings - - -
Total contributions by and distributions to owners (5) (1 344) -
Balance at 31 August 2015 369 582 012 -
Balance at 1 March 2016 365 580 649 72
Profit for the period - - -
Other comprehensive income
Foreign currency translation differences for
foreign operations - - -
Total other comprehensive income - - -
Total comprehensive (loss)/income
for the period - - -
Transactions with owners, recorded directly
in equity
Contributions by and distributions
to owners - - -
Total contributions by and distributions to owners - - -
Balance at 31 August 2016 365 580 649 72
Trans-
lation Retained Total
R'000 reserve earnings equity
Balance at 1 March 2015 27 033 56 577 667 340
Profit for the period - 6 160 6 160
Other comprehensive income
Foreign currency translation differences
for foreign operations 1 269 - 1 269
Total other comprehensive income 1 269 - 1 269
Total comprehensive income for the period 1 269 6 160 7 429
Transactions with owners, recorded directly
in equity
Contributions by and distributions to owners
Shares acquired - - (1 349)
Foreign currency translation differences
transferred to retained earnings (12 262) 12 262 -
Total contributions by and distributions to owners (12 262) 12 262 (1 349)
Balance at 31 August 2015 16 040 74 999 673 420
Balance at 1 March 2016 27 756 60 260 669 102
Profit for the period - 7 497 7 497
Other comprehensive income
Foreign currency translation differences for
foreign operations (8 188) - (8 188)
Total other comprehensive income (8 188) - (8 188)
Total comprehensive (loss)/income
for the period (8 188) 7 497 (691)
Transactions with owners, recorded directly
in equity
Contributions by and distributions
to owners - - -
Total contributions by and distributions to owners - - -
Balance at 31 August 2016 19 568 67 757 668 411
Information about reportable segments
for the six months ended 31 August/twelve months ended 29 February 2016
August August February
R'000 2016 2015 2016
Construction
Segment revenues 665 687 726 869 1 350 102
Reportable segment profit before income tax 5 464 16 632 20 221
Reportable segment assets 174 203 659 664 282 261
Developments
Segment revenues 2 781 47 883 94 739
Reportable segment profit before income tax 747 5 446 21 555
Reportable segment assets 111 804 121 213 139 683
Corporate and eliminations
Segment revenues (2 182) (2 201) (8 940)
Reportable segment profit/(loss) before income tax 5 689 (11 319) (35 273)
Reportable segment assets 796 426 332 364 678 981
Consolidated
Segment revenues 666 286 772 551 1 435 901
Reportable segment profit before income tax 11 900 10 759 6 503
Reportable segment assets 1 082 433 1 113 241 1 100 925
August August February
R'000 2016 2015 2016
Geographical information
South Africa
Total revenue 640 204 772 551 1 333 827
Reportable segment profit before income tax 7 192 9 164 77
Total assets 1 058 124 1 097 725 190 209
Other regions
Total revenue 26 082 17 845 43 950
Reportable segment profit before income tax 4 708 1 595 6 426
Total assets 24 309 15 516 1 239
Consolidated
Total revenue 666 286 772 551 1 377 777
Reportable segment profit before income tax 11 900 10 759 6 503
Total assets 1 082 433 1 113 241 191 448
Financial asset at fair value through profit or loss
Level 3: The contingent consideration receivable arose from the disposal of the discontinued operation
in the 2014 financial year, which included a clause that entitles the seller to an amount of R150 million
if the discontinued operation's cumulative EBITDA over the next three years exceeds a threshold. The
fair value is determined considering the estimated receivable, discounted to present value. The fair
value is based on key unobservable inputs of EBITDA growth of the business of 12% in the year ending
December 2016 and a discount factor of 10,5%. The fair value was determined by the group finance
department. Scenarios on EBITDA growth were developed by the management together with management
of the discontinued operation, considering the economy generally and their knowledge of the geotechnical
business. The estimated fair value increases the higher the annual EBITDA growth rate, the higher the
EBITDA margin and the lower the discount rate. Management considers that changing the above-
mentioned unobservable inputs to reflect other reasonably possible alternative assumptions would
not result in a significant change in estimated fair value.
Directors:
B Krone (Chairman)+
WC van Zyl (CEO)
BW Atkinson (CFO)
Dr OW Franks* (Lead independent)
R Masemene*
HJ Sonn*
* Independent non-executive
+ Non-executive
Company secretary
iThemba Governance and Statutory Solutions (Pty) Limited
Monument Office Park
Suite 5 - 102
79 Steenbok Avenue
Monumentpark
0181
PO Box 25160
Monumentpark
0181
Registered office
30 Activia Road
Activia Park
Germiston
1401
PO Box 6478
Dunswart
1508
Telephone: +27 11 776 8700
Fax: +27 11 822 1158
Sponsor
Vunani Corporate Finance
Vunani House
Vunani Office Park
151 Katherine Street
Sandton
2196
PO Box 652 419
Benmore
2010
Transfer secretaries
Computershare Investor Services (Pty) Limited
70 Marshall Street
Johannesburg
2001
PO Box 61051
Marshalltown
2107
Investor relations
Singular Systems IR
28 Fort Street
Birnam
Johannesburg
2196
PO Box 785261
Sandton
2146
24 November 2016
Date: 24/11/2016 08:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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