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ESR - Esorfranki - Reviewed interim results for the six months ended 31 August

Release Date: 26/10/2010 07:05:09      Code(s): ESR
ESR - Esorfranki - Reviewed interim results for the six months ended 31 August  
2010                                                                            
ESORFRANKI LIMITED                                                              
(Registration number 1994/000732/06)                                            
Incorporated in the Republic of South Africa                                    
JSE Code: ESR    ISIN: ZAE000133369                                             
("Esorfranki" or "the company" or "the group")                                  
REVIEWED INTERIM RESULTS                                                        
for the six months ended 31 August 2010                                         
ORDER BOOK: R1 billion                                                          
REVENUE: DOWN 26%                                                               
EBITDA: DOWN 68%                                                                
HEPS: DOWN 90%                                                                  
OPERATING CASH GENERATED: R58,7 million                                         
SHORT-TERM PROSPECTS PIPELINE: R1 billion                                       
Condensed consolidated statement of financial position                          
                                 31 August   31 August     28 February          
                                 (Reviewed)  (Reviewed)    (Audited)            
                                 2010        2009          2010                 
R`000       R`000         R`000                
Assets                                                                          
Non-current assets                986 302     999 341       999 551             
Property, plant and equipment     586 833     602 042       596 429             
Intangible assets                 91 057      94 789        93 737              
Goodwill                          305 715     299 759       305 715             
Deferred tax asset                2 697       2 751         3 670               
Current assets                    622 468     768 221       648 273             
Inventories                       10 989      13 661        14 827              
Other investments                 8 846       15 895        6 762               
Taxation                          -           3 929         9 952               
Trade and other receivables       514 623     540 372       499 869             
Cash and cash equivalents         88 010      194 364       116 863             
Total assets                      1 608 770   1 767 562     1 647 824           
EQUITY AND LIABILITIES                                                          
Share capital and reserves        758 829     673 374       808 028             
Share capital and premium         396 958     340 421       396 956             
Equity compensation reserve       10 687      4 696         8 253               
Foreign currency translation      (34 630)    (6 409)       (14 296)            
reserve                                                                         
Retained earnings                 385 814     334 666       417 115             
Non-current liabilities           376 813     367 499       405 711             
Secured borrowings*               255 638     259 918       275 031             
Post-retirement benefits          1 665       1 587         1 665               
Deferred tax liabilities          119 510     105 994       129 015             
Current liabilities               473 128     726 689       434 085             
Current portion of secured        136 437     112 324       121 677             
borrowings*                                                                     
Taxation                          17 027      84 311        6 644               
Provisions                        14 510      35 321        21 087              
Trade and other payables          305 154     494 733       284 677             
Total equity and liabilities      1 608 770   1 767 562     1 647 824           
Net asset value per share         258,4       241,7         275,6               
(cents)                                                                         
Tangible net asset value per      161,1       139,7         177,5               
share (cents)**                                                                 
* Interest-bearing debt                                                         
** (Net asset value less intangible assets)/weighted average shares             
Condensed consolidated statement of comprehensive income                        
                           Six months ended                Year ended           
31 August  31 August            28 February          
                           (Reviewed) (Reviewed)           (Audited)            
                           2010       2009        Change   2010                 
                           R`000      R`000       %        R`000                
Revenue                     750 798    1 018 268   (26,3)   1 857 817           
Cost of sales               (603 294)  (727 180)   (17,0)   (1 361 041)         
Gross profit                147 504    291 088     (49,3)   496 776             
Other income                2 969      603         392,4    3 937               
Operating expenses          (75 302)   (56 103)    34,2     (111 661)           
Profit before interest,     75 171     235 588     (68,1)   389 052             
tax, amortisation,                                                              
impairments and                                                                 
depreciation                                                                    
Depreciation, impairments   (37 158)   (59 328)    (37,4)   (83 478)            
and amortisation                                                                
Results from operating      38 013     176 260     (78,4)   305 574             
activities                                                                      
Finance costs               (17 184)   (61 599)    (72,1)   (93 106)            
Finance income              3 079      46 039      (93,3)   63 281              
Profit before income tax    23 908     160 700     (85,1)   275 749             
Income tax expense          (11 597)   (45 846)    (74,7)   (78 108)            
Profit after tax            12 311     114 854     (89,3)   197 641             
Other comprehensive                                                             
income:                                                                         
Foreign currency            (22 553)   (21 060)    7,1      (32 630)            
translation differences                                                         
for foreign operations                                                          
Actuarial loss on post      -          -           -        (28)                
retirement benefit                                                              
Income tax on other         2 219      -           100      3 683               
comprehensive income                                                            
Other comprehensive loss    (20 334)   (21 060)    (3,5)    (28 975)            
for the period, net of                                                          
tax                                                                             
Total comprehensive         (8 023)    93 794      (108,6)  168 666             
(loss)/income for the                                                           
period                                                                          
Profit attributable to:                                                         
Owners of the company       12 311     114 854     (89,3)   197 641             
Total comprehensive                                                             
(loss)/income                                                                   
attributable to:                                                                
Owners of the company       (8 023)    93 794      (108,6)  168 666             
Basic earnings per share    4,2        41,3        (89,8)   69,4                
(cents)                                                                         
Diluted earnings per        4,2        40,9        (89,7)   68,6                
share (cents)                                                                   
Headline earnings per       4,1        41,3        (90,1)   71,3                
share (cents)                                                                   
Diluted headline earnings   4,1        40,9        (90,0)   70,5                
per share (cents)                                                               
Reconciliation of                                                               
headline earnings                                                               
Profit attributable to      12 311     114 854              197 641             
ordinary shareholders                                                           
Adjusted for:                                                                   
Loss on disposal of         918        31                   5 396               
property, plant and                                                             
equipment                                                                       
De-recognition of non-      (3 605)    -                    -                   
controlling interests in                                                        
subsidiary                                                                      
Impairment of property,     1 200      -                    -                   
plant and equipment                                                             
Impairment of intangible    1 182      -                    -                   
assets                                                                          
Headline earnings           12 006     114 885     89,5     203 037             
attributable to ordinary                                                        
shareholders                                                                    
Number of ordinary shares                                                       
in issue (`000)             302 162    289 495              302 162             
diluted weighted average    295 628    281 122              288 038             
weighted average            293 403    278 121              284 743             
Condensed consolidated statement of cash flows                                  
                                   Six months ended         Year ended          
                                   31 August   31 August    28 February         
(Reviewed)  (Reviewed)   (Audited)           
                                   2010        2009         2010                
                                   R`000       R`000        R`000               
Cash flows from operating                                                       
activities                                                                      
Profit for the period               23 908      160 700      275 749            
Adjustments for:                                                                
Depreciation of property, plant     33 278      41 095       64 193             
and equipment                                                                   
Impairment of intangible assets     1 624       -            -                  
Impairment of property, plant and   1 200       -            -                  
equipment                                                                       
Amortisation of intangible assets   1 056       18 233       19 285             
Profit on disposal of property,     -           -            (182)              
plant and equipment                                                             
Loss on disposal of property,       1 275       31           7 806              
plant and equipment                                                             
Unrealised foreign exchange         (14 806)    (24 777)     (16 512)           
differences                                                                     
Equity settled share-based payment  2 434       779          4 336              
transactions                                                                    
Income tax refund/(paid)            5 702       (30 272)     (126 898)          
                                   55 671      165 789      227 777             
Change in inventories               3 838       (2 282)      (3 448)            
Change in trade and other           (14 754)    32 428       72 931             
receivables                                                                     
Change in trade and other payables  20 477      (35 548)     (85 165)           
Change in provisions                (6 577)     4 203        (10 031)           
Net cash from operations            58 655      164 590      202 064            
Cash flows from investing                                                       
activities                                                                      
Proceeds from sale of property,     125         9 411        3 085              
plant and equipment                                                             
Acquisition of business             -           -            (113 828)          
Acquisition of property, plant and  (37 306)    (64 034)     (96 034)           
equipment                                                                       
(Acquisition)/disposal of other     (2 084)     (1 626)      7 507              
investments                                                                     
Net cash used in investing          (39 265)    (56 249)     (199 270)          
activities                                                                      
Cash flows from financing                                                       
activities                                                                      
Proceeds from the issue of shares   2           1 342        5 311              
Decrease in secured borrowings      (4 633)     (146 025)    (121 559)          
Post-retirement benefits paid       -           -            (79)               
Dividends paid                      (43 612)    (42 119)     (42 429)           
Net cash used in financing          (48 243)    (186 802)    (158 756)          
activities                                                                      
Net decrease in cash and cash       (28 853)    (78 461)     (155 962)          
equivalents                                                                     
Cash and cash equivalents at        116 863     272 825      272 825            
beginning of period                                                             
Cash and cash equivalents at end    88 010      194 364      116 863            
of period                                                                       
Condensed consolidated statement of changes in equity                           
                                                           Equity               
Share       Share        compensation         
R`000                              capital     premium      reserve             
Balance at 1 March 2009            278         338 800      3 917               
Profit                                                                          
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                                                         
Issue of ordinary shares           1           1 342                            
Dividends to equity holders                                                     
Share-based payment transactions                            779                 
Share options exercised                                                         
Total contributions by and         1           1 342        779                 
distributions to owners                                                         
Balance at 31 August 2009          279         340 142      4 696               
Balance at 1 March 2010            292         396 664      8 253               
Profit                                                                          
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                                                         
Dividends to equity holders                                                     
Share-based payment transactions                            2 434               
Share options exercised            2                                            
Total contributions by and         2           -            2 434               
distributions to owners                                                         
Balance at 31 August 2010          294         396 664      10 687              
                                                                                
                                  Translation Retained     Total                
R`000                              reserve     earnings     equity              
Balance at 1 March 2009            14 651      261 931      619 577             
Profit                                         114 854      114 854             
Other comprehensive income                                                      
Foreign currency translation       (21 060)                 (21 060)            
differences for foreign                                                         
operations                                                                      
Total other comprehensive income   (21 060)    -            (21 060)            
Total comprehensive income for     (21 060)    114 854      93 794              
the period                                                                      
Transactions with owners,                                                       
recorded directly in equity                                                     
Contributions by and                                                            
distributions to owners                                                         
Issue of ordinary shares                                    1 343               
Dividends to equity holders                    (42 119)     (42 119)            
Share-based payment transactions                            779                 
Share options exercised                                                         
Total contributions by and         -           (42 119)     (39 997)            
distributions to owners                                                         
Balance at 31 August 2009          (6 409)     334 666      673 374             
Balance at 1 March 2010            (14 296)    417 115      808 028             
Profit                                         12 311       12 311              
Other comprehensive income                                                      
Foreign currency translation       (20 334)                 (20 334)            
differences for foreign                                                         
operations                                                                      
Total other comprehensive income   (20 334)    -            (20 334)            
Total comprehensive (loss)/income  (20 334)    12 311       (8 023)             
for the period                                                                  
Transactions with owners,                                                       
recorded directly in equity                                                     
Contributions by and                                                            
distributions to owners                                                         
Dividends to equity holders                    (43 612)     (43 612)            
Share-based payment transactions                            2 434               
Share options exercised                                     2                   
Total contributions by and         -           (43 612)     (41 176)            
distributions to owners                                                         
Balance at 31 August 2010          (34 630)    385 814      758 829             
                                  Six months ended         Year ended           
31 August   31 August    28 February          
                                  (Reviewed)  (Reviewed)   (Audited)            
                                  2010        2009         2010                 
Dividends per ordinary share       -           -            15,0                
(cents)                                                                         
Information about reportable segments for the six months ended 31 August        
                                                                                
                          Geotechnical            Civils                        
R`000                      2010         2009       2010       2009              
External revenues          423 180      527 674    225 321    375 498           
Reportable segment profit  12 016       70 913     20 849     89 217            
before income tax                                                               
Reportable segment assets  713 901      793 534    459 909    498 805           
                                                  Corporate and                 
                          Pipelines               eliminations                  
R`000                      2010         2009       2010       2009              
External revenues          102 297      130 553    -          (15 457)          
Reportable segment         2 254        27 587     (11 211)   (27 017)          
profit before income tax                                                        
Reportable segment         103 546      181 791    331 414    293 432           
assets                                                                          
                                                                                
                          Consolidated                                          
R`000                      2010         2009                                    
External revenues          750 798      1 018 268                               
Reportable segment         23 908       160 700                                 
profit before income tax                                                        
Reportable segment         1 608 770    1 767 562                               
assets                                                                          
Geographical information                                                        
                          South Africa            Other                         
                                                  regions                       
R`000                      2010         2009       2010       2009              
Total revenue              589 879      906 763    160 899    111 505           
Profit before interest     4 215        155 202    33 802     21 058            
and tax                                                                         
Profit after tax           (9 867)      112 411    22 178     2 443             
Total assets               1 307 756    1 561 031  301 014    206 531           
                                                                                
                          Consolidated                                          
R`000                      2010         2009                                    
Total revenue              750 798      1 018 268                               
Profit before interest     38 013       176 260                                 
and tax                                                                         
Profit after tax           12 311       114 854                                 
Total assets               1 608 770    1 767 562                               
COMMENTARY                                                                      
The directors of Esorfranki present the results of the group for the six months 
ended 31 August 2010 ("the period"). A number of factors negatively impacted on 
the group during the period, pressuring certain key financial indicators (as per
Esorfranki`s trading updates of 16 July 2010 and 5 October 2010). These included
difficult trading conditions in the construction sector, inclement weather,     
intensifying competition and margin squeeze. The disruptive effects of the      
Soccer World Cup on certain projects, and the general lassitude in the wake of  
this event, further restricted top and bottom line growth.                      
Financial results                                                               
Revenue reduced by 26,3% to R750,8 million from R1 018,3 million in the previous
comparative period, generating EBITDA of R75,2 million compared to EBITDA of    
R235,6 million in August 2009. Headline earnings decreased by 89,5% translating 
into HEPS of 4,1 cents per share, 90,1% lower than the previous comparative     
period.                                                                         
Cash generated by operations totalled R58,7 million.                            
Gearing                                                                         
Through focused attention on reduction of net external debt notwithstanding less
cash generated from operations, gearing was lowered to 34,1% from 35,6% for the 
previous comparative period. Borrowings are as a result of the finance raised   
for the acquisition of the Esorfranki business operations, working capital and  
the now restricted capital expansion programme (see `CAPEX and plant replacement
policy` below).                                                                 
Review of operations                                                            
Protracted delays in the award of certain major contracts particularly affected 
Esorfranki Pipelines and Esorfranki Civils, while challenges in Sub-Saharan     
Africa reflected in the poorer performance of Franki Africa`s East and West     
coast operations. This situation is expected to improve in the second half of   
the year as both delayed and new projects start to come on stream.              
Operating margins came under pressure on some of the group`s contracts due to   
lower activity levels in the industry overall. Unfavourable weather conditions  
further exacerbated the situation, with excessive rainfall in the Gauteng region
during the period. In addition Esorfranki incurred a once-off cost for          
restructuring initiatives.                                                      
Working capital cycles increased as a result of delayed collections from        
government as well as from main contractors in the Geotechnical business unit.  
This resulted in the group effectively borrowing a further R33 million, by re-  
advancing previously paid-up facilities, to fund its working capital            
requirements.                                                                   
In Africa the geotechnical market has not developed as anticipated and has been 
subjected to economic constraints similar to the rest of the world, the effect  
of which on Esorfranki has been compounded by the Rand`s strength.              
The rapid decline in contract awards, and consequently in group revenue,        
necessitated an immediate and extreme restructuring of both the KwaZulu-Natal   
and Gauteng geotechnical operations. This unfortunately resulted in nearly 600  
retrenched positions. A restructuring exercise has also been completed at       
Esorfranki Pipelines and Esorfranki Civils, with the offices combined into one  
premises using shared administrative support functions.                         
Esorfranki Geotechnical                                                         
This business unit comprises Franki Africa and Esor Africa. Despite a tough     
economic environment, revenue of R423,2 million declined only 19,8% from the    
previous comparative period. This equates to 56,4% of group revenue and         
generated a contribution to group Profit Before Tax ("PBT") of R12 million.     
Foreign revenue accounted for 38% of the business unit`s revenue. Overall       
operating margins decreased to 5,9%.                                            
Franki Africa amassed a loss of R20,5 million in the completion of the DP7      
package of the Gautrain during this period. This was mainly due to the effects  
of excessive rain in March, April and May and challenging geotechnical          
conditions in confined working areas. Difficult piling conditions on the N4     
contract resulted in a loss of R6 million for Esor Africa. In addition to       
trading hurdles in African countries, foreign operations were also adversely    
affected by the strengthening of the Rand during the period.                    
Esorfranki Civils                                                               
This business unit achieved revenue of R225,3 million, or 30% of group revenue, 
and generated PBT of R20,8 million. Heavy rainfall as mentioned above also      
impacted on this business unit, specifically the R21 contract, exacerbated by a 
six week disruption for the duration of the World Cup. The weather had an       
equally negative impact on the N4 and other mining infrastructure contracts.    
Esorfranki Pipelines                                                            
This business unit achieved revenue of R102,3 million, a contribution of 13,6%  
to group revenue, with PBT of R2,3 million. The flagship contract - the BG3     
project for Rand Water - has been slow to start as a result of access problems  
related to landowner issues, service relocations and water permits as well as   
blasting trials. In addition the contract was unexpectedly halted for six weeks 
for the duration of the World Cup. Certain other contracts have also been       
subjected to extended award periods and continual extensions of tender          
validities.                                                                     
CAPEX and plant replacement policy                                              
During the period the group invested R37,3 million (31 August 2009: R64,0       
million) in property, plant and equipment. Going forward the directors have     
placed on hold any planned capital expenditure pending normalisation of market  
conditions.                                                                     
R2,0 million of the total spend in respect of property relates to the office    
conversion at the Germiston premises, which saw the Esorfranki Pipelines offices
consolidated into the Esorfranki Civils` premises. Construction on a proposed   
new head office at Commercia in Midrand (where the group`s plant yard is        
currently situated) began during the period but has since been suspended.       
Black Economic Empowerment                                                      
Esorfranki is currently rated as a `Level 5` contributor to broad-based BEE.    
The group`s commitment to transformation is evidenced by its 29,07% black       
shareholding (including retail shareholders on the open market). Through the    
Esor Broad Based Share Ownership Scheme, staff hold a 4,4% stake in the company.
More than 85% of the group`s 3 059 (3 700 in 2009) strong workforce is black.   
Events after the reporting date                                                 
There were no significant events after the reporting date.                      
Prospects                                                                       
The board remains positive of the group`s growth prospects in the second half of
the year notwithstanding prevailing market conditions, clients experiencing     
liquidity constraints and decline in demand continuing to result in project     
cancellations and postponements. Esorfranki`s order book stood at R1,0 billion  
at 31 August 2010, which includes R300 million worth of orders to be completed  
in the 2012 financial year.                                                     
The group is shortlisted for the award of a further R1 billion of potential     
projects in the short term.                                                     
However, a number of adverse factors outside of Esorfranki management`s control 
may continue to impact on these and other future opportunities. The factors     
include the non-award of tenders, ongoing funding constraints hampering client  
activity and increasingly tight competition.                                    
In the long term general prospects are more positive. The economy is slowly     
recovering and projects are likely to go ahead as spending is inevitable to     
facilitate positive annual GDP growth. This optimistic outlook is underpinned by
Government`s reiterated commitment to infrastructure. The need for considerable 
spending in certain sectors should drive work despite tough economic conditions,
such as in water and sanitation, road infrastructure and power (the current     
infrastructure will reach the end of its efficient life cycle by 2020/25).      
The group will maintain its established presence across Sub-Saharan Africa to   
capitalise on growth opportunities in this region. Conditions in certain areas  
such as Mauritius and Mozambique are showing sustainable buoyancy, and while    
only comprising a small portion of Esorfranki`s offshore revenue currently,     
these areas are growing healthily in contribution.                              
Dividend policy                                                                 
In line with group policy no interim dividend has been declared. It remains the 
policy of the group to review the dividend policy annually in light of cash     
flow, gearing, capital requirements and bank covenants.                         
Statement of compliance                                                         
The reviewed condensed consolidated interim financial statements for the period 
have been prepared in accordance with and contain the information required by   
International Accounting Standard ("IAS") 34 - Interim Financial Reporting and  
the AC500 series issued by the Accounting Practices Board. The accounting       
policies and method of measurement and recognition applied in preparation of the
condensed consolidated interim financial statements are consistent with those   
applied in the group`s annual financial statements for the year ended 28        
February 2010, which comply with International Financial Reporting Standards    
("IFRS").                                                                       
Auditor`s independent review                                                    
These condensed consolidated financial results for the interim period have been 
reviewed by the company`s auditors, KPMG Inc., in terms of International        
Standards on Review Engagements 2410. The scope of the review was to enable the 
auditors to report that nothing had come to their attention that caused them to 
believe that the accompanying condensed consolidated interim financial          
statements are not presented, in all material respects, in accordance with IAS  
34 - Interim Financial Reporting and the South African Companies Act. Their     
unmodified review report on the condensed consolidated interim financial        
statements is available for inspection at the registered office of the company. 
Appreciation                                                                    
We thank our executives, management and staff for their tenacity and efforts in 
a tough environment. Esorfranki`s people remain our key strength and competitive
advantage. Thank you also to our fellow directors for your wise counsel.        
Finally, thanks to our advisors, suppliers, clients and stakeholders for your   
ongoing support.                                                                
On behalf of the board.                                                         
Bernard Krone                     Wayne van Houten                              
Chief Executive Officer           Chief Financial Officer                       
26 October 2010                                                                 
CORPORATE INFORMATION                                                           
DIRECTORS:                                                                      
DM Thompson* (Chairman)                                                         
B Krone (CEO)                                                                   
W van Houten (CFO)                                                              
EG Dube*                                                                        
MB Mathabathe*                                                                  
Dr FA Sonn*                                                                     
*Non-executive                                                                  
REGISTERED OFFICE:                                                              
30 Activia Road, Activia Park, Germiston, 1401                                  
(PO Box 6478, Dunswart, 1508)                                                   
Telephone: +27 11 822 3906                                                      
Fax: +27 11 822 3112                                                            
SPONSOR:                                                                        
Vunani Corporate Finance                                                        
Vunani House, Athol Ridge Office Park                                           
151 Katherine Street, Sandown, Sandton, 2196                                    
(PO Box 413972, Craighall, 2024)                                                
TRANSFER SECRETARIES:                                                           
Computershare Investor Services (Pty) Limited                                   
70 Marshall Street, Johannesburg, 2001                                          
(PO Box 61051, Marshalltown, 2107)                                              
COMPANY SECRETARY:                                                              
iThemba Governance and Statutory Solutions (Pty) Limited                        
Monument Office Park, Suite 5-102                                               
79 Steenbok Avenue, Monument Park                                               
(PO Box 25160, Monument Park, 0105)                                             
AUDITORS:                                                                       
KPMG Inc.                                                                       
KPMG Crescent                                                                   
85 Empire Road, Parktown, 2193                                                  
(Private Bag 9, Parkview, 2122)                                                 
www.esorfranki.co.za                                                            
Date: 26/10/2010 07:05:08 Supplied by www.sharenet.co.za                     
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