On the upside the Inland division posted an excellent performance, Developments successfully concluded its first ‘cradle to grave’ project and the 2016 Tuboseal acquisition was fully integrated and performed to expectation, giving Esor first-time access to the Western Cape. However, ongoing work to address quality issues on the Northern Aqueduct project continued to plague the Coastal division. The group ended the year with an order book of R1,5 billion on a par with last year and significantly up on interims.
Esor maintained revenue year-on-year at R1.4 billion. CEO Wessel van Zyl says the top-line performance is satisfactory given the losses on the additional repair work at Northern Aqueduct which amounts to R102 million for the 2017 financial year. Profitability was severely impacted by the Northern Aqueduct losses, the non-realisation of the R50 million Franki agterskot in terms of the 3-year earn-out clause under the sale agreement, and the impairment of R51 million goodwill resulting in a loss of R139,8 million compared to a profit of R3,7 million in the prior year. Cash flow and liquidity remained challenging and Esor focused on debtors management.
Van Zyl describes the year as “the best of times, the worst of times”. He says the industry remained a hard task master with ongoing delays in contract awards and starts exacerbated by high rainfall in the second six months. “Against the backdrop of a struggling market we are pleased with our operational achievements in all divisions save for East Coast. Inland leveraged its Eskom projects to record a historical best performance and all completed projects were profitable, we concluded the milestone Orchards project marking our expertise in developments and we successfully bedded down Tuboseal to expose new geographical and cross-selling opportunities for the group.” Further, Esor maintained its Level 3 BEE rating in terms of the revised Codes and improved its LTIFR to 0.29 with zero fatalities, in line with industry benchmarks.
Esor also made solid progress in Africa with the segment performing well for the year. Projects continue looking favourable in Swaziland, where the group is on site with its third contract and has established strong local partnerships, Botswana and Zimbabwe. Van Zyl adds that Zambia remains a target area in which Esor is tendering for select work with well-known clients.
Regarding the Northern Aqueduct van Zyl is realistic. “It remains an onerous contract to complete given the nature of the repair work to legacy quality issues and working in a constrained area. A number of factors prevented completion by year-end including rain and community unrest, resulting in cost overruns.” The group now expects to complete the project in December 2017 and is finalising an agreement with the client on the replacement of bedding materials. Esor’s initial professional indemnity insurance claim relating to the repair costs of the defective welds has been accepted and R48 million has been taken to book.
During the year longstanding shareholder Geomer upped its stake in the group to 52%. The two groups have long been exploring possible synergies, specifically in the water and sanitation space, and Geomer also funded the initial Tuboseal acquisition, followed by the fully underwritten R37.5 million rights offer to shareholders. Geomer’s investment has had the added benefit of boosting Esor’s black ownership on the BEE scorecard to 65.51%.
Looking ahead van Zyl says Esor is in a healthy position to successfully navigate through the next two years. While he expects little respite in industry conditions over that time, he says pending awards of R1,6 billion at May 2017 means Esor has secured sufficient work to see the group through the cycle ahead. He adds that streamlining the group into three key regional divisions focussed on product lines has yielded a more efficient structure with measurable benefits. Africa remains a medium term focus area.
He concludes: “We have adequate work, people and resources and will continue to focus on our core competencies. Further, we anticipate more work still to come to market particularly for Inland, and we will adapt accordingly to secure our share.”