Esor pushed to brink of failure
• KwaZulu-Natal’s eThekwini municipality blamed for holding R36m as another construction firm goes to the wall
Another decades-old construction firm has been pushed to the brink of collapse. Engineering group Esor on Monday applied for business rescue of its largest subsidiary, Esor Construction.
Another decades-old construction firm has been pushed to the brink of collapse: this time, engineering and building group Esor, which on Monday applied for business rescue of its largest subsidiary, Esor Construction.
It appears KwaZulu-Natal municipality eThekwini, hoarding R36m of Esor’s cash under a retention clause signed for the Northern and Western Aqueduct project, is largely to blame.
Esor CEO Wessel van Zyl said had eThekwini released the funds 12 months ago when it approached them, “we wouldn’t be in this position today”.
Construction companies usually put down 10% of the value of a project with clients as a form of security but, said Van Zyl, it means they are invariably cash negative given a relentless squeeze on margins.
“It’s my cash, but it’s lying in the client’s bank account. I think cash retention is one of the main items impacting on contractors today,” he said.
Esor is also owed R22m by fellow construction outfit Basil Read, but is unlikely to get that money back after Basil Read itself applied for business rescue — a legal avenue to rehabilitate a company under financial distress that can stave off liquidation — two months ago
One of the biggest groups, Aveng, is teetering after wouldbe white knight Murray & Roberts walked away from a bid to buy the company.
eThekwini senior manager of water design, Simon Scruton, did not comment.
Esor’s shares listed on the JSE during the construction boom in 2006 and briefly peaked at 925c in 2007 giving it a market cap of more than R2bn. But it plunged 50% on Monday to close at 4c, slashing its market cap to R19.4m.
The company owes about R130m to creditors and has been unable to obtain either short- or medium-term funding to help it ride out its liquidity crunch.
Esor has also incurred “significant losses” on construction contracts in this and previous financial years and said that the consortium of financiers it had been negotiating with “were not prepared to make any funding available outside of a formal business rescue process”.
Still, Esor believes it has a “reasonable” prospect of rescue.
Former CEO and current nonexecutive chairman Bernie Krone said “at our peak we employed close to 5,000 people. We’re down to 1,400 people and they’re probably going to lose their jobs — that’s what is really sad about it.”
As it is, the company has been trying to salvage what it could and has begun retrenchments to cut costs by about R4m a month.
Other efforts included negotiations to sell land held on its books, renegotiating payment terms with suppliers and subcontractors, the refinancing of vehicles and equipment, earning it more than R12m, and the sale of noncore assets.
The more than 10% fall in Sappi’s share price in Monday’s early trade after it reported lower quarterly profit and earnings, was an overreaction, says CEO Steve Binnie.
The decline in the share price, the biggest intraday drop since July 2015, wiped off about R5bn of the company’s market capitalisation. It closed 9.51% weaker at R91.30.
Binnie said even though the company experienced nonrecurring operational and production problems at its SA and North American businesses during the quarter, these did not warrant the massive drop in the share price.
“This seems like an overreaction,” he said.
The once-off problems pertained to longer than anticipated shutdowns at its Somerset Mill in the US and Ngodwana, Mpumalanga plant, said Binnie.
Sappi spokesperson Andre Oberholzer said on Monday that problems with third-party contractors caused the delays.
Binnie said that as a result of the operational and production problems, “lost opportunity” for Somerset Mill and Ngodwana operations were $8m and $3m, respectively. The diversified woodfibre group said maintenance shutdowns and “additional production and commissioning issues” at Ngodwana and at Saiccor mill in Umkomaas, KwaZulu-Natal, reduced production by about 30,000t.
Cobus Cilliers of 36ONE Asset Management said he had expected slightly better results from the company even though the third quarter is the company’s maintenance season.
He concurred with Binnie that the fall in the share price seemed excessive.
“I agree with that. I think people expected better performance. But it is worth noting that the production issues are nonrecurring. In the next 12 months the company is well poised to capture market share,” Cilliers said.
In the third quarter to June, profit fell from $58m to $51m. The company attributed the lower profit to increased depreciation expense following the higher capital expenditure activity. In the period, Sappi’s capital expenditure was $188m.
“Capital expenditure increased due to the now completed paper machine conversion at Somerset Mill and the debottlenecking of dissolving wood pulp production at our Ngodwana and Saiccor mills,” Binnie said.
Earnings per share were marginally down from US11c to US10c a share, and earnings before interest, tax, depreciation and amortisation was unchanged at $155m.