Esor, a civil engineering and construction group has had a difficult time of late, with a number of loss-making contracts on its books and share prices dipping nearly 80% over the last year. The company released its results today, making an expected headline loss per share. Adding to the quagmire of negative press for Esor, Investec has recently sold a portion of its 10% stake in the company. It all seems like doom and gloom for Esor, with dipping prices sparking knee-jerk reactions, but Bernie Krone, CEO of Esor, has a different story to tell. With promising work in the pipeline, and a refocusing of energies as the loss-making projects are all but completed, Krone has strong beliefs in the future operations of Esor. This may very well be the value stock that investors are looking for, it is currently trading at a share price of 37 cents and Krone reckons that it’s worth 168 cents given asset value. If you’re looking for a bargain, it might be worth getting down to the basics of the balance sheet, and going in for the long haul. – LF
GUGULETHU MFUPHI: Esor, one of South Africa’s benchmark engineering and construction groups, reported a full-year headline loss per share. The company’s revenue from continuing operations however, was up. Joining us now to unpack the numbers is Bernie Krone, Chief Executive of Esor. Thank you so much. Just following up on Alec’s statement before the ad regarding your share price, perhaps it’s time for it to go up. Is there any potential for it to increase?
BERNIE KRONE:  Well, I certainly hope so. We’ve probably bottomed out as far as bad news is concerned, but it is still tough out there. Too many people are competing for too little work. Margins are tight. One has to do the best one can and obviously, loss-making contracts just hang around with you forever, and it’s very difficult to finish them. We believe we’re well on track for that now. Those losses were a little bit bigger than we thought at interims.
ALEC HOGG:Â Are they out of the system?
BERNIE KRONE:  Well, we are still busy but we have accounted for them. One of them is finished. It was finished in February. We finished the other one today. We just finished the last snagging. A small part of that is still going on, and then we’re only finishing N4 at the end of August, but that was due to a problem, which was not really our fault. Well, it wasn’t our fault. Total order book remaining…there are R25m worth of those legacy contracts still to do.
ALEC HOGG:  Bernie, when we look at your shares, the value of the company is now R134m. You have – potentially – another R150m as an ‘agterskot’ coming to you from the deal you did with Keller.
BERNIE KRONE:  That’s right.
ALEC HOGG:  How firm is that R150m? Clearly, what you’re saying here is you have the whole business for free because if there is an ‘agterskot’ to come from the transaction you did (that many people criticised you for), that would already take care of your current market cap.
BERNIE KRONE:  Yes, we think we’re set up to probably get R100m, which will be paid 10/30/60 over the next three years, probably.
ALEC HOGG:  Over three years…so we’re getting the rest of your business for R34m, and what’s in there? What’s it worth? What’s your tangible asset value?
BERNIE KRONE: Â Our tangible asset value is R1.68 per share, I think.
@pierre_puren @MatthewFerrey These things tend to over-react in short-term. I'd wait for speculative heat to leave system before buying.
— Alec Hogg (@alechogg) May 30, 2014
ALEC HOGG: Â And in millions of Rands?
BERNIE KRONE:  Well, what’s that multiplied by 400-million shares?
ALEC HOGG:  It’s R500m.
BERNIE KRONE: Â Yes, R500m.
ALEC HOGG:  So you’re buying… Gugu, here we go. You like bargains. You go into a shop. You have a R500.00 dress. You get it for R34.00. Would you buy it?
GUGULETHU MFUPHI: I would, as long as it’s good quality. Maybe that’s the question that we should ask, going forward.Â
BERNIE KRONE:  We still have three divisions in our construction portfolio, which is basically the pipelines. They’ve had some good growth. They were marking time for quite a few years. They’ve now had good growth and we’re sitting at a nine percent operating margin. Civils has been our problem child. I think we believed our own story a little bit too much. We invested too much money in there. We completely rationalised and reinvigorated that business. It’s just getting rid of the loss-making contracts now, as we said. Going forward, there’s a good culture…there’s a good ‘gees’ in that particular business going forward, and then we have the developments business, which is a fledgling business that only did about R30m worth of work. It showed a small profit, but that will develop as we go forward.
GUGULETHU MFUPHI: What about looking for silos of opportunity? I think Group Five, which is a lot bigger and more diversified, are really concentrating on renewable energy now.
BERNIE KRONE:  I think that right now, we’re going to stick to the nitty-gritty. I think we have to complete what we have. We have to deal with what we have and it’s just a period of refocusing, consolidating, and then maybe growth can come out of that.
ALEC HOGG:  Two things that worry me: this week, Investec announced (now, they like good value stocks) that they are selling down their stake in you. They’ve gone down one-point-three percent to nine-and-a-half percent.
BERNIE KRONE:  Yes, they were slightly above ten percent and now they’re slightly below nine percent. They sold one-point…whatever it is.
ALEC HOGG:  You don’t sell something that’s a R34.00 dress, if it’s worth R500.00.
BERNIE KRONE:  I don’t know.
ALEC HOGG: Â Did they not talk to you about it?
BERNIE KRONE:  They didn’t talk to us. They just sent us the letter, as they’re required to do in terms of JSE listing requirements.
ALEC HOGG:  And Briss Mathebane…his resignation…
BERNIE KRONE:  Yes, Briss was never really keen. He was inherited through the BEE structure with Petula. We thought it would be a good idea to have him on the board.
ALEC HOGG:  So that shouldn’t put us off.
BERNIE KRONE:  No, that shouldn’t put you off.
ALEC HOGG:  Are you not in a position then, if your shares are that cheap, to buy back shares? You cleared your debt, that very expensive debt that you had.
BERNIE KRONE:  Yes, I don’t think we really have the cash to be able to do that right now. Any spare cash that we did have, we would rather put into developments to get them rolling along nicely. We obviously still have this huge thing hanging over us in terms of our claims at Kusile, which many of the contractors have. I think we’re in a slightly different position. It’s a small amount in terms of some of the bigger contractors, but we have a claim there.
ALEC HOGG: Â Explain that.
BERNIE KRONE:  Well, we’ve been working there since March 2011, and the type of work we’re doing is very prone to being stopped/redirected, so we currently probably have over 400 variations or instructions to say ‘go and work somewhere else’. That’s cost us money, so we are in the process (with Eskom) of trying to finalise that claim.
GUGULETHU MFUPHI:Â How much money exactly?
BERNIE KRONE:  Well, how long is a piece of string? We have one figure. They probably have another figure. In our order of magnitude, it’s a couple of hundred million.
ALEC HOGG: Â Are they paying you or are you paying them?
BERNIE KRONE: Â No, they need to pay us.
ALEC HOGG:  They need to pay you, so that’s not a negative.
BERNIE KRONE:  It’s not a negative, no.
ALEC HOGG:  So where are the negatives here? Who’s selling your shares at 34 cents, Bernie? In fact, it got down to 29 cents last week.
BERNIE KRONE:  Yes. I don’t know. I think it’s just that negative perception. Loss-making contracts…I know many contractors have them. They call them legacy contracts. I don’t know whose legacy it was, but it happened while I was there as well, so there are contracts that I’ve known about all the time. I didn’t expect them to go this far south.
ALEC HOGG: It’s a threat to the business – this business is being priced for liquidation. Where does that come from?
BERNIE KRONE:  Well, the sun shone this morning and we’re still all at our desks. We’re all working. We believe we’ve had our nadirs. We believe we’re on the way out.
ALEC HOGG: Â On the way up, I hope.
BERNIE KRONE:  I’m sorry. I meant ‘on the way out of the trough’. We need to solve our problem at Kusile and get that paid. There is intent from both parties – willingly – to want to get this settled.
GUGULETHU MFUPHI: Well, let’s find some optimism in these numbers then, Alec. It does seem as though things are getting slightly dreary. You mentioned that the future prospects…there was a lot of potential work with local government, mainly in KwaZulu Natal and Gauteng. Is government a good working partner for you?
BERNIE KRONE:  Look, government pays us. I know there’s a lot of negative perception out there. They pay in terms of the contract, if it’s payment on the last day of the month. If it’s 60-day payment, they pay you 60 days, so we are paid. We’re quite happy. We’ll take the work where it is. I think one has to manage it, but it’s not that negative working for the government. We have three housing contracts now in KwaZulu Natal. We are being paid. We are busy at Diepsloot East. We are being paid. In addition, there are the parastatals – Eskom – they do pay us what we’re due in our certificates. They pay us at the end of the month. In fact, they pay us before the end of the month.
