Build­ing bridges

Win­ner Esorfranki beats seven to bag R800m con­tract

Finweek English Edition - - COMPANIES & MARKETS - LEANI WES­SELS leani.wes­sels@fin­

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.

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