RAIL AND ELECTRICAL engineering group Racec managed in 2010 to do what very few small companies that dabble in the broader infrastructural seem to manage: a swift turnaround in fortunes. Understandably, chairman Mike Uys can be forgiven for veering close to “told you so” territory in Racec’s latest annual report when he reminds shareholders that last year he cited some large rail contracts pending award that could lead to a significant change in its fortunes.
Indeed, that did materialise and Racec not only turned around 2009’s losses but also reversed an interim loss of R2m into after-tax profits of almost R13m.
That, quite frankly, is damned good chugging in the second half – a period that, Racec CEO Gary Harrod reminds us, was still characterised by delays in contract awards. He adds Racec’s Rail segment secured 95% of its turnover budget, with its gross profit margins beating budget by 185%. But if we were to look critically at Racec’s comeback then perhaps the cash conversion rate could come under question.
The company posted nearly R30m in net operating profits but only banked R11m its cash flow statement showed.
Engineering contracts aren’t exactly about cash on the barrel-head and longer projects obviously take months to settle. Sometimes it can be an uncomfortable wait… and Racec, which had to dash out a rights issue to raise working capital last year, probably knows that all too well. So it’s rather commendable then that Racec does provide a breakdown of its major trade creditors as at end-September 2010 in its annual report. It may be reassuring to shareholders worried about cash flows to see exactly who owes what.
The bills to Eskom and Transnet – two obvious clients – reduced significantly to R1,6m each (from R6m and R3,7m respectively in its 2009 financial year).
But Racec’s biggest trade debtor – perhaps a little disconcertingly – isn’t identified. A trade debt of more than R18m is labelled “anonymous” – with the annual report noting: “The name of this company is not disclosed due to a sensitive stage of negotiations.”
Make of that what you will…