Wrap Text
Strategy update
Group Five Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1969/000032/06)
Share code: GRF ISIN: ZAE000027405
("Group Five” or “the Company” or “the group”)
Strategy update
As committed to shareholders in the SENS release of 6 October 2017, Group Five’s board of
directors (“Board”) and management have re-evaluated the group’s strategy and structure to
address underperformance and the achievement of acceptable returns in a rapidly-changing
and challenging market landscape.
This process included the strategic re-positioning of the group in its chosen markets and an
assessment of all the group’s clusters and businesses resulting in a narrower focus on core
businesses which will provide growth and improving margins and returns.
1. STRATEGIC DECISIONS
Against ongoing market and economic changes, the group sees an increasing role for being
an enabler for the development of infrastructure projects in the markets in which it operates.
This requires an increased shift in emphasis from the group’s historical traditional construction
weighting towards infrastructure development and investment opportunities, which
necessitates the rationalisation of some of its businesses.
All clusters and businesses have therefore been reviewed and evaluated against certain
criteria to determine their alignment with the group’s revised strategy. The criteria included
anticipated market certainty, internal competency, capacity and capital risk management.
Those businesses that have a high probability of meeting or exceeding the group’s targeted
return on capital will be retained.
Investments & Concessions
The group has finalised its preferred strategy for the Investments & Concessions cluster. This
cluster meets the requirements set out above and is central to the group’s revised strategy of
enabling the development of infrastructure.
The group has a strong track record in Investments & Concessions in Europe and a solid
pipeline of opportunities to address growth. It has also identified a number of opportunities in
Africa, in sectors where there are pressing needs for infrastructure, where funding can be
sourced competitively and where the group believes it can compete successfully.
However, in line with the board’s responsibility to ensure it evaluates all opportunities to deliver
optimal shareholder value, the board is assessing the ongoing credible expressions of interest
received before ratifying and communicating its final strategy for this cluster.
Manufacturing
The group’s Manufacturing cluster, which contributed 10% to group revenue for the year to
June 2017, remains a strong performer within the group and contributes solid earnings and
cash flow. However, it is regarded as a non-core operation and, in light of the group’s revised
strategy, will be disposed of in due course.
Construction and EPC
The Construction and EPC clusters reported an operating loss for the financial year ended 30
June 2017, with 57% of this revenue derived from contracts in South Africa. The local market
continues to face significant headwinds, with minimal large-scale infrastructure projects being
awarded and the prospect of infrastructure projects curtailed in light of political uncertainty,
ratings downgrades, low business confidence and fiscal strain. Further ratings downgrades
are forecast and government infrastructure spend is expected to continue on this current low
trajectory.
Against these conditions, Group Five’s traditional construction businesses are finding it
challenging to secure sufficient levels of revenue to remain profitable.
The group has therefore decided to pursue a strategy of migration to smaller, streamlined
construction businesses, focusing only on those businesses which have competitive
advantages in target client groups.
The group’s Construction cluster and engineer, procure and construct (EPC) clusters have
been evaluated against the group’s revised strategy and the criteria listed above. Businesses
which do not meet all three criteria will be, and have started to be, exited. Only those
businesses which have the potential to exceed the group’s targeted minimum return on capital
will be retained.
As Group Five’s exposure to basic construction is being scaled down, the group will benefit
from reduced balance sheet requirements, less operational execution risk and improved
capital risk management.
A core focus area for the Construction and EPC clusters remains the reduction of corporate
and business overheads.
2. NEXT STEPS
Investments & Concessions
The group has refined its Investments & Concessions (I&C) strategy.
This has involved the extraction of the investments portion of the portfolio within I&C and
creating a stand-alone Developments & Investments (D&I) cluster. D&I will access growth
within targeted regions along with credible partners leveraging equity investments and
project opportunities.
The Operations and Maintenance (O&M) businesses within the I&C cluster, along with the
Power O&M businesses in the group, will be consolidated to form a separate cluster,
leveraging the group’s international skills and experience as a professional operator and
maintainer of public and private infrastructure in key sectors.
The board also continues to assess various expressions of interest received for its I&C
assets and operations. Group Five is committed to provide investors with an update of its
progress and next steps on this cluster in a timeous and regular basis.
Manufacturing
Management is evaluating multiple expressions of interest received. Group Five will provide
investors with an update as soon as any outcome on negotiations becomes probable.
Construction and EPC
The group has concluded that it will:
- Exit construction businesses which the group does not see the potential to turn
around on a sustainable basis and which are not core to the revised strategy
These businesses will either be sold or closed. Once the requisite legal and internal
consultation and closure procedures have been followed, Group Five will be in a position
to advise which businesses are affected.
- Retain viable construction businesses
Businesses will be retained if they can show real:
- Areas of opportunity identified
- Proven capabilities and capacity
- Clear, differentiated offerings within the market
- Compelling investor value propositions
- Potential to provide shareholder returns exceeding the group’s cost of capital
The requirements of the voluntary rebuild programme (VRP) with the South African
government will be met from within these businesses. It is intended that the group's
responsibility to the VRP agreement will be settled through the implementation of an
economic structure or structures in these businesses that will facilitate black economic
empowerment. The group has appointed corporate finance advisors to assist in this
regard.
- Create a focused turnkey project management team
The group also intends to retain a small and dedicated team offering higher-margin turnkey
project management, mainly in the rest of Africa. The target projects will be small to
medium in size and of medium complexity commensurate with the group’s technical
abilities and its re-assessed risk-bearing capacity. This team will be supported by, and
include, the group’s current structural, mechanical, electrical, instrumentation and piping
(SMEIP) business in the rest of Africa, as well as its Power team.
The group has an established Power team in place to drive this strategy. This team has
had a successful track record in this market for the last 11 years. Its loss-making ratio for
the last four reporting periods since December 2015 has not exceeded 3%.
The Group Five board and management will strive to timeously and regularly communicate
updates to the market in tandem with the employee consultation processes.
07 November 2017
Sponsor
Nedbank Corporate and Investment Banking
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