Protech Khuthele Holdings, a 21-year old civil engineering group with a specific emphasis on fast-track contracting, today announced its year end results to February 2010.

The group's results were impacted by three main factors:
50% impact on earnings: excessive rainfall
• The areas of geographic operation was much more concentrated than usual due to the group's coal mining focus
• 80% of the group's work was concentrated in areas where the 60-year rainfall average was exceeded by more than 100% in the fourth quarter alone
30% impact on earnings: worsening market conditions
• The recession's negative impact was even more powerful in the second half of this year
• Increased competition was seen, rolling over to Protech's chosen mining markets
20% impact on earnings: public sector infrastructure spending delays
• As widely reported, there were severe delays in public infrastructure spending

"The greatest impact on us during the year was the abnormal inland rainfall experienced as our operations were much more concentrated due to our pro-active shift into the coal mining sector where there was still some growth. This severely impacted productivity and the roll out and start up of contracts. Furthermore, as we said in May last year and at interim time in November, we expected market conditions to make it difficult for us to maintain our very strong historic growth trend. Although we are never pleased with any decrease in numbers, our still-strong margins and continued winning of blue-chip contracts indicate that our business model and strategy was robust against several negative factors. We have R1,1 billion of current work in progress for quality clients, with 91% of that being new work won since November 2009," said Protech Khuthele CEO Gerald Chapman.

Summary 

• Revenue increased by 7% to R748,8-million (2009: R702,7-million). 

• This was entirely organic growth and indicate an ability to quickly shift to sectors where there were some growth
o In line with the group's commitment, it pro-actively shifted to mining, with this sector now representing 50% of contracts. The strained private sector only represented 10%
• Operating profit declined by 24% to R118,6-million (2009: R156-million)
• Earnings per share was 18% lower to 20,9 cents per share (2009: 25,6 cents per share)
o Severe margin erosion was prevented, with group operating margin of 16%
o The margin of historic businesses (excluding Readymix) was 19%
• Cash generated before working capital changes was 13% down to R153,8 million (2009: R177,4-million)
o When comparing cash generated by operations before working capital changes to EBIDTA, the ratio of cash generated to EBIDTA improved from 94% in 2009 to 95% in 2010. The group therefore remains confident of its cash generating ability
• Maiden dividend of 4 cents per share, which is five times covered. The group intends to pay an annual dividend

"During the period, we did not waver from our unique plant policy of replacing plant after two years. This protected us against the state of the equipment market and was crucial in the period under review. The advantages of our supplier arrangements and demo-quality fleet were demonstrated by the R3 million-profit on the sale of equipment this year and no impairment charges.
"Also, in reality our current average fleet age is only one year. This is unprecedented compared to the industry average of around six years. Our plant therefore suffers no downtime, is always under warranty and has no cash flow risk on plant failure. This places us in a strong competitive position against some market players with ageing plant - especially when the next up-cycle begins," added Chapman.

Going forward, he said:

"As outlined above, we start the 2011 year with 99% of our 2010 group revenue already secured and a strong pipeline of quality work. This was achieved without pricing stupidly, which will support margins over the long term. As our baseline of work is now in place to ride through what will continue to be stormy conditions, we are now in a flexible position to negotiate new work at higher margins from here on, which will flow through to our results in the second half of F2011.

"In line with industry growth expectations, of our R1,4 billion pipeline, mining work makes up 90%. As we have already sunk the pre-contract costs on mining clients to ensure we are fully inducted and ready to work in strict conditions, the income will start to flow through more strongly now.

"We do recognise the need to diversify geographically to spread our rainfall risk. To this end we continue investigating opportunities in other areas of South Africa outside of the coal-centered provinces. We have also opened offices in Botswana, Zambia and Zimbabwe."

OPERATIONAL REVIEW

Contracting (83% of group revenue)

The Civils and Earthworks (Protech Khuthele), plant hire and logistical services (Pela Plant) and Impact Compaction form the Contracting arm of the group.

• Revenue for Contracting was up 9% to R640,2-million (2009: R589,2-million) against the market backdrop of a 50% decline in the total value of contracts awarded in the civils industry
o The increase was achieved due successfully winning several new contracts, as well as contract extensions and shifting to the mining sector where there was still some growth
• However, excessive rainfall, increased competition and certain pre-contract investments on mining contracts impacted the operating profit, resulting in a 24% decline. Margins remained solid at 19%

Geotechnical (2% of group revenue)

Geotechnical comprises a geotechnical laboratory and survey services. The Geotechnical division supports Contracting by providing timeous and quality geotechnical and survey services
• Although this business is a small contributor to the group, it performed extremely well. Revenue was up 42% to R16,1-million due to increased capacity. Operating profit was up from R0,8-million last year to R2,8-million this year, resulting in a 18% margin. The main reason for the strong improvement was due to higher revenue now being spread over a relatively fixed cost base

Readymix (15% of group revenue)

Protech Readymix (Readymix) manufactures and delivers readymix concrete and concrete pumping services across all sectors. Clients include construction groups. In line with Protech's vertical integration strategy, Readymix increased its supply to the group's Contracting arm, with 6% of business being done in-house this year.
• Against very tough market dynamics, Readymix managed to sustain its market share through pro-actively driving sales and further entrenching its first-to-market reputation. In line with this, volumes during the last three quarters were up year on year by 6%. However, the first quarter was negatively impacted by the Easter holidays and the elections, as well as excessive rainfall. Volumes therefore declined by 5% year on year
• Revenue for the year increased by 5% to R113-million. As expected and indicated at interim time, margin remained under pressure and the business posted an operating loss of R5,4-million for the year