Winner Esorfranki beats seven to bag R800m contract
IT’S A SIGN OF THE times that Esorfranki CEO Bernie Krone isn’t swinging from a chandelier in celebration. It emerged last week that the group beat seven other bidders to be awarded the R800m Western Aqueduct tender in KwaZulu-Natal. That’s momentous news, Bernie. So where’s the gloating, the air pumps, the PR fanfare? There were a few of us getting nervous about Esorfranki. Not only has it been plagued by project delays and a shrinking order book, but the market was also starting to price into the share it would be successful in the bid. Since reporting dismal results in October last year, its price has actually ended a year-long decline, levelling out at around 200c/share. Finweek shudders at the thought of a share free falling on bad news.
The group also embarked on a R200m rights issue in December to get its gearing under control. As with the rest of SA’s construction firms, its order book was looking wobbly after a few expensive acquisitions in 2008. These factors – along with the major delays that resulted in that 90% earnings plunge in October – is why Krone has been referred to as “the previously eternal optimist” by analysts.
So it’s no surprise Krone will wait for the first shovel to hit earth before he starts celebrating. The aqueduct project was a game-changer for Esorfranki and its closest competitor for the bid, civil engineering group Sanyati. “Esorfranki will now probably over-perform and Sanyati is looking much riskier, as it will have to scramble to pick up jobs,” says Thebe small cap analyst Keith McLachlan.
Both firms have been struggling with delayed projects or shrinking pipelines since the bottom fell out of the construction industry. And both were very vocal about their chances to land the bid. Esor put its experience in pipelines on the table; Sanyati had the black empowerment qualifications and tendered at a lower price. The project also includes roadworks and is a lifeline out of this downturn for Esorfranki’s geotechnical division, which has retrenched more than 600 workers since work started drying up in 2009.
But McLachlan says this was a winwin situation for Esorfranki, since Sanyati decided to price its bid at what would have most likely been a loss. Even Government estimates the project to be worth around R150m more than Sanyati tendered. That carries huge contractual risk and Esorfranki might have been called to mop up the mess had Sanyati been the chosen bidder. Even had Sanyati aimed to merely keep the doors open by breaking even on the project, the contractual risk was just too big. Rather lay off some staff or sell off some assets.
And then there was one. Sanyati doesn’t have a pipeline for long-term projects, says Thebe construction analyst Janine Weilbach. “What you see now is what they’ve got.” According to the group’s results for the six months to end-August 2010, its current awards are R1,8bn, with no projects in the prospective pipeline. The market is pricing the share for pain at 33c, compared with its tangible net asset value of around 60c.
As with most other construction firms on the counter, Sanyati made a few expensive acquisitions when the industry couldn’t keep up with the amount of work available and is now being penalised by the market. Meyker Group, Ruthcon Civil Contractors and Gem Earthworks and KZN Piling were acquired between 2008 and 2009. Even though Sanyati didn’t incur more debt to finance those and rather diluted the living daylights out of the share, that kind of capacity won’t go without pushing up costs. “Overhead costs and staff complement in anticipation of large tender awards – such as the Western Aqueduct project – are creating unnecessary costs without the coupled revenue stream,” says Weilbach.