Stefanutti CEO puts on gloss where none exists. Why ignore static EDITDA, lower cash flow and call a 35% “profit” rise?

Having worked on the business end of TV cameras on and off for a couple decades, I know how intimidating they can be for those with less exposure to the medium. So try my best to put guests at ease – and never to use the unfair environmental advantage when disagreements erupt on air. But that just wasn’t possible today with Stefanutti & Stocks CEO Willie Meyburg who had been given a script and seemed determined to stick to it. Despite my highlighting the distortion which the non-cash depreciation charge had made (positively) to an obviously a pedestrian six month period, he ignored the real issue and went right on to point out the “35% increase in operating profit.” That got the interview off to a poor start, and it seemed to keep getting worse. Sometimes I wish the media trainers focused more on getting their clients to just tell the truth (warts and all as Cromwell quipped to his portait artist) rather than insisting they put the best possible gloss on things. – AH

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Willie Meyburg where he's most comfortable - TV studios not his favourite place. Pic courtesy of BDLive.
Willie Meyburg where he’s most comfortable – TV studios clearly not his favourite place. Pic courtesy of BDLive.

ALEC HOGG:  Stefanutti Stocks saw interim diluted headline earnings per share rise by 36 percent to 34 cents.  The company noted that its tender margins remained, due to the scarcity of infrastructure projects and limited mining and industrial concrete work.  The Chief Executive of the company joins us now.  However, those headline earnings per share numbers are a little bit distorted.  Willie Meyburg.  I’m sure you’ll agree that your depreciation charge is a reason for it.

WILLIE MEYBURG:  Yes, even though some of our divisions didn’t perform to our expectations, I think we’re pleased with the 35 percent improvement in the operating profit.  What is important to us is that the strong business units like the structures – perform well again, as usual.  The Roads Pipeline and Mining unit – they’ve increased their contribution towards operating profit.  The problem still lies in building and we’re trying to get out of the woods there.  We still have some legacy/historic projects in matters we’re dealing with in Mozambique.  Then there are the current projects in South Africa where there are compensation events or claims that we need to resolve as a result of change orders as well as scope changes.  We are in discussions with the clients to see if we can resolve it.  It’s unlikely that we will resolve it in the next six months, but we are working close to it.  Mechanical Electrical Power has done well.  They were profitable.  Unfortunately, there were some losses at power, and some holding costs, mainly as a result of no work coming through the marketplace from the national energy provider.

ALEC HOGG:   Willie, I thought I was going nuts. So I just checked the SENS announcement again.  Your EBITDA was unchanged from last year.  Your depreciation number was reduced dramatically – on cash items – and as a consequence of that, your profits were up 35 percent.  That’s not an operating issue.  That depreciation issue assisted you.

WILLIE MEYBURG:  While it is, we have not gone backwards in terms of EBITDA.  I’ll explain to you.  The main reason for it was the losses – the R43 million rand building where we still incur losses and we can see that going forward for the year.

ALEC HOGG:  No, I get it, but you aren’t 35 percent up in this period.  In fact, if I look at the way your operations are going, I see your operating cash flow is down substantially and you’re telling a good story, but I don’t know if I’m buying it.  What’s it looking like in the next six months?

WILLIE MEYBURG:  Well, in terms of the EBITDA we could see that there would be stability as well as possible improvement in EBITDA.  I can however, also say to you that there will be a reduction in depreciation because we’re spending less on capital equipment.  We’re probably only going to spend R130 million on capex by the financial year-end, which is down, we spent over R285 million the previous year.  We’re therefore managing the business in a way that’s not only in the operations side.  We’re paying close attention to the loss-making projects where have problems, we’re dealing with that and it has taken us some time to get to the problem issues, especially building and power.  The rest are doing well.

ALEC HOGG:  In terms of geotechnical, because you have a geotechnical operation…Esorfranki Geotechnical has now been bought out by the global giant, Keller.  Is that going to change the competitive environment?

WILLIE MEYBURG:  Well, I’m sure that the new owner will still compete in this market.  I don’t think they’ll pull out of the Southern African market, so that market is still competitive.  The fact that it’s dependent on the development of buildings – which is still not happening to a large extent – although there are a number of projects in the building market, not so much in Gauteng where power is required.  However, we operate quite effectively in Namibia, Botswana, and Mozambique where all the contracts are now profitable and there’s less piling required there in geotechnical.  In Southern Africa, the market’s competitive, but outside our borders – yes we’re doing well in geotechnical.

Stefstocks' three year share price graph reflects a business that's having its problems.
Stefstocks’ three year share price graph reflects a business that’s having its problems. Click here for more data on the company, 

GUGULETHU MFUPHI:  How are your confidence levels after the fine you were hit with by the Competition Commission regarding collusion in the construction sector?

WILLIE MEYBURG:  Well, I don’t think the business’ confidence level is any different, or that we’re negative.  I think there are things that have happened in the past and we’re busy paying our penalties.  We paid our first instalment.  In addition, we have also settled all the projects within the fast track system, as well as two projects that were outside the fast track system.  We’re starting to pay the penalties and we can’t say we’ve put that behind us because we need to deal with whatever’s in our way going forward.  However, in terms of business confidence we feel that we’re in a much better position than eight months ago where we had more operational issues in the business and that’s a fact.  We’re only dealing with building and power now.

ALEC HOGG:  What about First Strut?  It’s been a big story here.  You managed to pick up one of the businesses.  How well was that business managed?

WILLIE MEYBURG:  Well, I can’t tell you how well they were managed.  Obviously, they had a major problem in terms of their cash issues and we had an opportunity to buy in Ergo Tech for a cheap price of one million from the liquidators.  They have been included quite nicely into our electrical and instrumentation division, and I must say they have added much value in terms of capacity and capability going forward.  In terms of our offering with our mechanical/electrical, I think it was a good acquisition for us.

ALEC HOGG:  It was fast tracked through the Competition Commission.  Was that because it was of strategic importance to Medupi or somewhere?

WILLIE MEYBURG:   No, it was not Medupi – it was at Sasol, because there were projects approaching from Sasol’s side where they had to do shutdowns.  Ergo Tech – prior to joining us when they were a first-aid group – was an integral part of that and Sasol assisted that because of strategic reasons on their side.