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ESOR LIMITED - Unaudited Condensed Consolidated Interim Results for the Six Months ended 31 August 2017

Release Date: 02/11/2017 08:00:00      Code(s): ESR       PDF(s):  
Unaudited Condensed Consolidated Interim Results for the Six Months ended 31 August 2017

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")

Unaudited condensed consolidated interim results
for the six months ended 31 August 2017

HIGHLIGHTS

-   Improved financial performance
-   African operations contributing positively
-   LTIFR improved to 0,17
-   Stable order book at R1,4 billion

COMMENTARY

Introduction
The unaudited condensed consolidated results for the six months ended 31 August 2017 ("the
period" or "H1") reflect a challenging H1 impacted by a deteriorating market environment with
delays in both contract awards and the commencement of new projects.

Despite current market conditions, Esor demonstrated a significant improvement in financial
performance for H1 compared to the losses at February 2017. Profit before tax amounted to
R3,1 million after accounting for R5,8 million in restructuring costs.

Irregular timing of payments from debtors further contributed to difficult trading conditions.
This necessitated a restructure of the group into a centralised construction business away from
the regional structure (Inland, East and West Coast). Operationally we continue to execute
contracts on a regional basis. However infrastructure and overheads in the regions have been
reduced in line with the current workload.

We have continued to focus on water related projects both from a capital and maintenance
perspective, as well as design and construct projects. The latter are longer term projects,
requiring additional technical and financial inputs and consequently result in longer lead times
in awards.

Cross-border work has increased with new contract awards in Swaziland and Zimbabwe post period
end for R120 million. Focus has been on securing funded projects in these regions to ensure
security of payment, particularly in Zimbabwe where payment for imported materials is a challenge
due to availability of currency. The Zimbabwean funded projects provide for off-shore payments
that assists with alleviating the currency risks.

The order book at period end was R1,41 billion compared to R1,40 billion at August 2016.
The slightly improved order book is not reflective of the buoyant tender market. The non-awarding
of tenders to contractors is currently frustrating and problematic, largely due to funding
constraints in government infrastructure budget allocations. Consistent with previous reporting
periods, we have included a two-year view on the Diepsloot Integrated Housing Development.
The order book excludes the Department of Water and Sanitation projects, where Esor was lowest
but awaiting appointment.

Financial results
Revenue decreased 17% to R553 million from R666 million in the comparative period. Profitability
was impacted by the challenging market conditions and continued remedial work on the Northern and
Western Aqueduct projects resulting in a small profit for the first half. Profit before tax was
down 74% to R3,1 million (2016: R11,9 million).

No goodwill impairment testing was performed as this is addressed annually at year-end, consistent
with previous interim reporting periods. At February 2017 goodwill totalled R65,4 million.

Cash flow and liquidity
Liquidity remains a challenge, balancing growth and expansion into SADC regions while incurring
further repair costs on the Northern and Western Aqueduct projects in KwaZulu-Natal, pending
insurance settlements. Cash was further negatively impacted by delayed payments from clients,
continuing to put pressure on Esor's cash flow. In response to the status of the current
depressed construction industry, the company has implemented further restructuring initiatives.
The restructure resulted in a once-off retrenchment cost of R5,8 million for the period with a
further R2,9 million incurred post period end. Employee numbers reduced from 2 495 at
February 2017 to 2 056 at period end. In order to retain key skills, where possible, the
reduction was implemented by not renewing LDC contracts which had terminated. In order to improve
the company's working capital, Esor's majority shareholder, Geomer Investments (Pty) Ltd has
advanced R10 million for working capital purposes. This loan is repayable in February 2018.

Northern Aqueduct
The insurance claim with regards to the weld repairs on the Northern Aqueduct project is in an
advanced stage of negotiation and finalisation is expected in the second half of this financial
year. As reported at February 2017, R20 million has been received to date as an interim payment.

Safety
Health and safety remains a priority and the group is committed to a Zero Harm approach.
The Lost Time Injury Frequency Ratio ("LTIFR") improved to 0,17 (February 2017: 0,29). This
reflects a substantial decrease in terms of targets as a result of the successful implementation
of an integrated SHEQ system throughout the group. The accreditation renewal audit by ISOQAR was
successfully completed and the ISO 9001, 14001 and OHSAS18001 accreditations have all been
renewed and are in place for the next three years.

Review of operations
For the period under review the group reported in two divisions: Esor Construction and
Esor Developments.

Esor Construction
The Northern and Western Aqueduct projects continued to prove challenging with environmental
factors including rain, vandalism and community unrest resulting in further delays. At the
Western Aqueduct the non-relocation of electrical and communication services, which is out of
the group's control, resulted in additional delays. The project is expected to be concluded in
March 2018, with additional costs of R30 million accounted for in H1. The Northern Aqueduct
project is substantially complete with primary testing of the lines being undertaken. The full
anticipated losses were provided for at February 2017 but certain anticipated concessions under
negotiations at February 2017 were not awarded by the client and resulted in a further loss of
R5 million incurred in this reported period.

Losses   incurred on both projects were offset by the continued strong performance in the Inland
region   and geotechnical divisions. This includes Tuboseal which post period completed the largest
lining   project in South Africa to date at Black Mac where a total of 3 434 m lining was installed
over a   nine-month period.

In line with Esor's strategy, we have continued to focus on water projects, submitting three bids
to the City of Cape Town in response to the design, construct and operating tenders for Salt
Water Reverse Osmosis plants ("SWRO"), commonly known as desalination projects. In addition, a
number of design and construct opportunities have arisen including a mining project in Zimbabwe,
student accommodation in Gauteng and a salmon farm in the Western Cape.

We continued to finalise ongoing claims on the Kusile project and have post period received an
on-account payment for the first tranche.

Africa
Esor continued to make progress in Africa with revenue increasing from 3% outside South Africa at
February 2017 to approximately 5,4% for the period. As these projects are all in a start-up phase,
a conservative approach to revenue recognition has been followed in the first half. An improved
performance in the second half is anticipated.

The work on hand in the SADC region has increased to 34% of the total order book. These include
the Swaziland joint venture on the LUSIP II project funded by African Development Bank and ZINWA
projects in Zimbabwe funded by World Bank.

Esor Developments
The developments division has focused on project feasibilities and consequently the group remains
in a low revenue phase as current projects move toward the development phases of their life cycles.
The Diepsloot and Khayelitsha projects continued to be delayed by government administrative
procedures, with Khayelitsha kick-off awaiting land transfer before the project can commence.
The development will encompass 368 top structures which will be available for immediate development
and a further 1 100 opportunities in the second phase. Diepsloot remains a medium to long-term
development with a total project potential of over R4 billion revenue and potential of over
10 000 units.

The Uitvlugt development is currently in the environmental approval and ROD phase, which is
expected to take another 12 months. Township development planning and feasibility studies were
conducted and finalised. This development may include 1 ha smallholdings, mixed use and
integrated developments. Demand for housing in the Vaal region is currently low and we are taking
a more conservative approach towards the development with phasing over a longer period.

The group commenced a small residential development in Boksburg (Gauteng) which is set to be
completed by mid-2018.

CAPEX
Capital expenditure for the period totalled R2,2 million (2016: R7,8 million) with a further
R20 million expected to be spent in the second half. The current average age of certain core fleet
items is above group targets and is being reviewed. In the next six months we will focus on
refurbishing and renewing critical equipment in line with supplier specifications and
group targets.

Transformation
Esor is currently Level 3 B-BBEE accredited in terms of the revised Codes of Good Practice.
The group's black ownership stands at 68,52%. We are currently in the process of an evaluation
of our accreditation and hope to improve our level going forward. The Esor Broad-Based Share
Ownership Scheme ("EBBSOS") holds 4,25%.

Directorate
Heather Sonn resigned from the board effective 27 October 2017. We thank her for her valuable
and critical contribution over the years as an independent non-executive director and chair of
the audit and risk committee and wish her well in her future endeavours.

A suitable replacement for Ms Sonn is being sought and will be announced in due course.

Chairman Bernie Krone has now been classified as independent, as he meets the requirements
in terms of King IV.

Competition Commission/CIDB
Esor was not party to the Competition Commission's settlement reached in October 2016 between
government and seven other South African construction companies. Esor settled amicably in a
negotiated manner with the company concerned where Esor was found guilty of the offence under
the fast track settlement that related to a Franki matter. 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 and we continue to
follow the legal process and timelines. The final hearing is expected in April 2018.

Esor received a formal inquiry letter in December 2016 related to the CIDB intending to institute
a formal inquiry in terms of Regulation 29 against the construction firms that were not a party
to the voluntary rebuild programme agreement. We are in ongoing negotiations to reach an
amicable settlement.

Prospects
While we expect challenging conditions to prevail there are several opportunities being pursued
as detailed above. Imminent awards totalling in excess of R2 billion, mainly in the bulk water
supply, is being awaited. We will continue focusing on water projects such as the desalination
projects. In particular, we will focus more on turnkey projects and working with strategic
partners to provide a competent and competitive bid for successful implementation.

We believe the group remains stable in challenging conditions.

Dividend declaration
In line with group policy, no dividend has been declared (2016: 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
There were no significant events after the reporting date.

Basis of preparation
The unaudited 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 the Financial Reporting Standards Council, the requirements of the
Companies Act of South Africa and the Listings Requirements of the JSE Limited. 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 company is continuing its assessment of new accounting standards and amendments to standards,
including IFRS 9, 15 and 16. Further information on the potential impact of these standards will
be presented in the annual financial statements for the year ending 28 February 2018.

The financial statements for the current interim period were prepared under the supervision of
Bruce Atkinson CA(SA), Esor's financial director.

These unaudited condensed consolidated interim financial statements have not been reviewed or
audited by Esor's independent external auditors.

Appreciation
We thank our management and staff for their continued hard work and loyalty. Our appreciation
also to our fellow directors for their guidance and wise counsel as well as our business partners,
suppliers, advisors and valued clients and shareholders for your loyal support.

On behalf of the board

Bernie Krone             Wessel van Zyl
Chairman                 CEO

2 November 2017

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

                                                             Unaudited      Reviewed          Audited
                                                             31 August     31 August      28 February
                                                                  2017          2016             2017
                                                                 R'000         R'000            R'000
ASSETS
Non-current assets                                               303 618     409   135        337 556
Property, plant and equipment                                    185 846     174   774        197 624
Goodwill                                                          65 447     112   091         65 447
Financial assets at fair value through profit or loss                  -      51   228              -
Deferred tax asset                                                    11 499              10 173         31 044
Investment and loan to joint venture                                  40 065              60 108         42 680
Loans and long-term receivables                                          761                 761            761
Current assets                                                       620 453             673 298        680 421
Loans and receivables                                                 42 998              37 428         40 578
Inventories                                                          103 275             127 435         98 557
Non-current assets held for sale                                           -               9 500              -
Taxation                                                              14 484               8 928         13 840
Trade and other receivables                                          446 706             471 474        522 086
Cash and cash equivalents                                             12 990              18 533          5 360
Total assets                                                         924 071           1 082 433      1 017 977
EQUITY AND LIABILITIES
Share capital and reserves                                           569 276             668 411        566 794
Share capital and premium                                            617 236             581 014        617 236
Equity compensation reserve                                              989                  72            557
Foreign currency translation reserve                                  28 514              19 568         28 497
Retained earnings                                                    (77 463)             67 757        (79 496)
Non-current liabilities                                               44 823              74 422         71 136
Secured borrowings*                                                   35 678              44 576         38 814
Deferred tax liabilities                                               9 145              29 846         32 322
Current liabilities                                                  309 972             339 600        380 047
Current portion of secured borrowings*                                45 255              57 508         31 869
Current portion of preference shares*                                      -               5 250              -
Bank overdraft*                                                       15 789                   -         27 487
Taxation                                                               5 306                   -            146
Trade and other payables                                             243 622             276 842        320 545
Total equity and liabilities                                         924 071           1 082 433      1 017 977
Net asset value per share (cents)                                      122,4               183,2          122,2
Tangible net asset value per share (cents)**                           112,3               161,0          112,1

* Interest-bearing debt.
**(Net asset value less intangible assets net of deferred tax)/issued shares at period end.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

                                                   Unaudited           Reviewed
                                                  six months         six months                         Audited
                                                       ended              ended                      year ended
                                                   31 August          31 August                     28 February
                                                        2017               2016           Change           2017
                                                       R'000              R'000                %          R'000
Revenue                                              553 075            666 286            (17,0)     1 373 048
Cost of sales                                       (522 696)          (645 038)           (19,0)    (1 358 591)
Gross profit                                          30 379             21 248             43,0         14 457
Other income                                           3 789             20 601            (81,6)        28 807
Operating expenses                                   (16 277)           (18 731)            13,1       (131 141)
Profit/(loss) before interest, tax,
amortisation, impairments and depreciation            17   891           23    118         (22,6)       (87   877)
Depreciation, impairments and amortisation           (14   096)         (10    640)        (32,5)       (72   967)
Results from operating activities                      3   795           12    478         (69,6)      (160   844)
Finance income                                         3   796            1    451         161,6         13   670
Finance costs                                         (4   445)          (2    029)       (119,1)        (8   248)
Profit/(loss) before tax                               3   146           11    900         (73,6)      (155   422)
Taxation                                              (1   113)          (4    403)         74,7         15   666
Profit/(loss) for the period                           2   033            7    497         (72,9)      (139   756)
Other comprehensive income:
Foreign currency translation differences for
foreign operations                                         (17)          10 497          (100,16)             741
Income tax on other comprehensive income                     -           (2 309)          100,00                -
Other comprehensive income for the period,
net of tax                                                 (17)           8 188          (100,21)             741
Total comprehensive income attributable to:
Owners of the company                                  2 016             15 685            (87,1)      (139 015)
Basic earnings per share (cents)                        0,44               2,05           (78,54)         (38,1)
Diluted earnings per share (cents)                      0,43               1,98           (78,28)         (36,7)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

                                                                   Unaudited            Reviewed
                                                                  six months          six months        Audited
                                                                       ended               ended     year ended
                                                                   31 August           31 August    28 February
                                                                        2017                2016           2017
                                                                       R'000               R'000          R'000
Cash flows from operating activities
Profit/(loss) before taxation                                          3 146              11 900       (155 422)
Adjustments for:
Depreciation of property, plant and equipment                         14 096              10 640         22 693
Impairment of goodwill                                                     -                   -         50 274
Reversal of impairment of loans and receivables                            -                   -         (3 876)
Amortisation and fair value adjustments
of financial assets                                                     -                     -              51 228
(Profit)/loss on disposal of property, plant
and equipment                                                       (113)                   531                    118
Foreign currency adjustment                                           24               (7   995)              4    009
Equity-settled share-based payment transactions                      432                      -                    485
Net finance costs                                                    195              (2    803)             (5    308)
Income tax (paid)/refund                                            (229)              4    124              (2    953)
                                                                  17 551              16    397             (38    752)
Change in inventories                                             (4 718)            (19    360)             14    085
Change in trade and other receivables                             75 380               6    092             (21    981)
Change in trade and other payables                               (76 923)              7    282              37    829
Change in provisions                                                   -             (17    040)            (15    127)
Net cash generated/(used) from operations                         11 290              (6    629)            (23    946)
Cash flows from investing activities
Proceeds from sale of property, plant and equipment                    -                   -                 10    473
Loan advanced to joint venture                                         -              (5 413)                15    000
Acquisition of property, plant and equipment                      (2 212)             (7 757)               (20    373)
Acquisition through business combination                               -                   -                (36    387)
Net cash used in investing activities                             (2 212)            (13 170)               (31    287)
Cash flows from financing activities
Proceeds from the issue of share capital,
net of expenses                                                        -                      -              36    222
Increase/(decrease) in secured borrowings                         10 250               1    265             (33    179)
Preference shares redeemed                                             -              (5    355)            (12    359)
Net cash generated in financing activities                        10 250              (4    090)             (9    316)
Net increase/(decrease) in cash and cash equivalents              19 328             (23    889)            (64    549)
Cash and cash equivalents at beginning of period                 (22 127)             42    422              42    422
Cash and cash equivalents at end of period                        (2 799)             18    533             (22    127)

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

                                                             Equity       Foreign
                                                            compen-      currency
                                       Share        Share    sation   translation           Retained          Total
R'000                                capital      premium   reserve       reserve           earnings         equity
Balance at 1 March 2016                  365      580 649        72        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 income/(loss)
for the period                             -            -         -          (8 188)              7 497           (691)
Total contributions by and
distributions to owners                    -            -         -                -               -              -
Balance at 31 August 2016                365      580 649        72          19 568           67 757        668 411
Balance at 1 March 2017                  463      616 773       557          28 497          (79 496)       566 794
Profit for the period                      -            -         -              -             2 033          2 033
Other comprehensive income
Foreign currency translation
differences for foreign operations         -            -         -              17                   -             17
Total other comprehensive income           -            -         -              17                   -             17
Total comprehensive income
for the period                             -            -         -              17               2 033       2 050
Transactions with owners, recorded
directly in equity
Contributions by and distributions
to owners
Share-based payments                       -            -       432              -                    -            432
Total contributions by and
distributions to owners                    -            -         -              -                 -              -
Balance at 31 August 2017                463      616 773       989         28 514           (77 463)       569 276

INFORMATION ABOUT REPORTABLE SEGMENTS FOR THE SIX MONTHS
ENDED 31 AUGUST/TWELVE MONTHS ENDED 28 FEBRUARY

                                                               Unaudited         Reviewed                   Audited
                                                                  August           August                  February
                                                                    2017             2016                      2017
                                                                   R'000            R'000                     R'000
Construction
Segment revenues                                                 556 326             665 687              1 342 296
Reportable segment profit/(loss) before income tax                10 533               5 464                (68 564)
Reportable segment assets                                        118 496             174 203                132 842
Developments
Segment revenues                                                     479               2 781                 66 263
Reportable segment profit before income tax                       (1 498)                747                  2 891
Reportable segment assets                                         85 505             111 804                 91 944
Corporate & Eliminations
Segment revenues                                                  (3 730)              (2 182)              (35 511)
Reportable segment profit/(loss) before income tax                (5 889)               5 689               (89 749)
Reportable segment assets                                        720 070           796 426        793 191
Consolidated
Segment revenues                                                 553 075           666 376      1 373 048
Reportable segment profit/(loss) before income tax                 3 146            11 900       (155 422)
Reportable segment assets                                        924 071         1 082 433      1 017 977

                                                               Unaudited          Reviewed        Audited
                                                                  August            August       February
                                                                    2017              2016           2017
                                                                   R'000             R'000          R'000
Geographical information
South Africa
Total revenue                                                    523 135           640 204      1 331 735
Reportable segment profit/(loss) before income tax                 3 687             7 192       (153 261)
Total assets                                                     908 155         1 058 124        987 466
Other regions
Total revenue                                                     29 940            26 082         41 313
Reportable segment profit/(loss) before income tax                  (541)            4 708         (2 161)
Total assets                                                      15 916            24 309         30 511
Consolidated
Total revenue                                                    553 075           666 286      1 373 048
Reportable segment profit/(loss) before income tax                 3 146            11 900       (155 422)
Total assets                                                     924 071         1 082 433      1 017 977

RECONCILIATION OF HEADLINE EARNINGS

                                                  Unaudited        Reviewed
                                                 six months      six months                       Audited
                                                      ended           ended                    year ended
                                                  31 August       31 August                   28 February
                                                       2017            2016         Change           2017
                                                      R'000           R'000              %          R'000
Profit attributable to ordinary shareholders          2 033           7 497            (73)      (139 756)
Adjusted for:
Loss/(profit) on disposal of property,
plant and equipment                                    (146)               337        (143)            85
Impairment of property, plant and equipment,
investments and goodwill                                   -                 -           -         50 274
Headline earnings attributable to ordinary
shareholders                                          1 887           7 834            (76)       (89 397)
Number of ordinary shares in issue (‘000)         493 982         395 185           25,0        493 982
Diluted weighted average                            473 080         378 730           24,9        380 889
Weighted average                                    463 737         364 941           27,1        367 101
Headline earnings per share (cents)                    0,41            2,15          (80,9)         (24,4)
Diluted headline earnings per share (cents)            0,40            2,07          (80,7)         (23,5)

Directors
B Krone (Chairman)*
WC van Zyl (CEO)
BW Atkinson (CFO)
Dr OSW Franks* (Lead Independent)
R Masemene*

* Independent non-executive

Company secretary
iThemba Governance and Statutory Solutions (Pty) Limited
R21 Corporate Park, 72 Regency Drive
Block A, Irene, 0157

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 652419, Benmore, 2010

Transfer secretaries
Computershare Investor Services (Pty) Limited
Rosebank Towers
15 Biermann Avenue, Rosebank

PO Box 61051, Marshalltown, 2107
Investor relations
Singular Systems IR
28 Fort Street, Birnam, Johannesburg, 2196

PO Box 785261, Sandton, 2146

www.esor.co.za

Date: 02/11/2017 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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