19 October 2009
Johannesburg — CONSTRUCTION and engineering firm Group Five 's strategy to diversify revenue across different sectors is likely to pay off handsomely once the economy recovers from the recession.
The group, which celebrates 35 years as a listed entity, has come a long way in becoming a multidisciplinary business with its fingers in at least 10 sectors of the economy. The group's strategy aims to reduce earnings volatility within the construction sector by capturing multiple margin streams across the infrastructure value chain.
But it has not always been a cakewalk for the group after it burnt its fingers on offshore projects, which saw it drop billions worth of construction projects in the Middle East after the global recession started.
Group Five, which operates in Africa, the Middle East and Eastern Europe, generated 63% of turnover from the South African market even though the three growth drivers -- public infrastructure, private gross fixed capital formation, and the resources market -- came to an abrupt end last year.
In its 2009 annual report, the group admits the economic super cycle came to a halt after a two-year good run from 2006 to last year. But it is hopeful that local public spending of R879bn will continue to keep some momentum going in the sector with enough scale and until the private sector recovers.
In the rest of Africa the group experienced slower growth as income from resources declined due to financial turmoil. To make matters worse, demand for Africa's resources exports fell and commodity prices declined accordingly. This meant Group Five could not benefit from projects planned in the African mining sector as the slowdown deterred foreign direct investment and made trade and project finance costlier.
But the group says the continent is better positioned to weather the crisis than it was 10 years ago as many countries have experienced prudent macroeconomic reforms in the past few years, which have strengthened fiscal balances and reduced inflation to single- digit levels.
In the Middle East, where the group generated 13% of its turnover, trading conditions were difficult due to the global economic downturn. Group Five lost R4bn of its Middle East order book due to the global financial crisis. But despite lower oil revenue, many Middle Eastern oil-exporting countries are expected to maintain the majority of their industrialisation and infrastructure spending programmes, which will benefit the group.
In Europe the group generated 3% of its turnover and it says its concessions business there continues to flourish.
Group Five is not doing too poorly regarding its board's representivity, with four female directors, two white and two black. Its chairman and company secretary are black women and six of its directors are black.
The group, with revenue of R12bn, plans to increase its capacity to secure and execute larger multidisciplinary contracts. It also wants to develop, invest in and operate concessions and property assets.
Group Five's focus has been on implementing and executing the strategy through carefully selecting target contracts that deliver maximum returns across all its businesses.
Chairwoman Philisiwe Buthelezi says the past financial year was one of the most turbulent economic periods in recent memory. "Group Five has for some years been following a diversification strategy designed to position the group to negotiate variable market conditions. Contract controls and strong management ability are now major drivers of success in the global construction sector, which means all players face the imperative of attracting and retaining the skills of highly talented industry specialists and business people, and using this talent to outperform rivals in the market place," she says.
However, Buthelezi says this is an ongoing challenge and "one the group continues to pay attention to without compromising its strong focus on its strategy and transformation". She says the group plans to keep its strategy relevant by keeping a balance between sector and geographic expansion.
But the group, which posted a 25% increase in profit to R797m, will in the short term continue to optimise opportunities in the local market. It stands to gain from the government's R787bn infrastructure spend in the target sectors of power, transport, water and public infrastructure contracts to be delivered through public- private partnership initiatives. Group Five believes it has the in-depth specialised knowledge such partnerships require.
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