Opportunity knocks – Esorfranki hit too hard by traders; Kagiso AM buys a chunk. You should too.
Esorfranki's share price has taken a serious hit since announcing the sale of its geotechnical division to the global leader in the field, Keller plc. Ahead of the announcement, the share price peaked at over 180c. The company is distributing a special dividend of 38c – so strip that out and the recent price peak was 142c. Yesterday EsorFranki shares were freely available at 79c, a price drop of almost half. In this CNBC Africa interview that followed the release of the company's financial results, we asked CEO Bernie Krone what's going on. He's bemused. Especially considering the net asset value (after the special divi) is around 250c – so the shares trade at under a third the company's intrinsic value. Looks like traders have over-reacted to the news of the sale, providing an opportunity for bargain hunters. Like Kagiso Asset Management which this morning announced it has acquired just under 6% of the company's equity. – AH
ALEC HOGG: Construction firm Esorfranki, has reported a 38.5 percent rise in first half revenues. That's from the operations it's still going to have after the sale to the Keller Group of its geotechnical business. Joining us to unpack the numbers is company Chief Executive, Bernie Krone. Well Bernie, I suppose if we start with the bad stuff first on the civil side, you took quite a bath. I don't think there are too many members of the public who would believe this because the perception amongst the public is that the construction companies are all making money hand over fist, because you're colluding amongst each other. Are you just bad colluders, or what happened here?
BERNIE KRONE: Well obviously, we are. Yes, we're very disappointed about the Civils numbers. There are three loss-making contacts and each of them has a different set of parameters and I suppose that has led to those losses. I think one of the things that we have to remember is that some of those contracts go back quite a long time. I think there was a little bit of a knee-jerk reaction after the World Cup in those times, when work was really scarce and there were very low margins. I think that's coming home to roost now.
ALEC HOGG: So you didn't get your calculations right. Is it as simple as that?
BERNIE KRONE: Yes, there are other factors as well. One of the contracts is up near Marikana – that's the N4 in the Rustenburg/Brits area. There's an underlying tension amongst labour etcetera. Productivity is not what it could be, although the guys are really trying their best. Sometimes the community does have an effect on your workforce. It's the same up at Kusile and some of the other contracts, too, so we're disappointed.
GUGULETHU MFUPHI: So labour's really having an impact on your numbers, even though it's not necessarily directly.
BERNIE KRONE: Yes, it's not always in the same divisions as well. Our pipelines division works very far away from major centres and they weren't impacted by strikes at all. They all carried on working, but Geotech and Civils came to a halt.
ALEC HOGG: Bernie, the big story for you though, has been the sale of your Geotech business for 500 million, to Keller. The market didn't like it at all. Your share price has just been in freefall ever since you announced it. I guess people are saying you might have sold it off too cheaply.
BERNIE KRONE: Well, I think we beat the price up from somewhere just below R400m up to R500m with a contingent consideration for three years going forward as well. It could bring it up to a total of R650m. It's cash-free and debt-free, so there's some cash that will come to us as well. I think if you look at it, the net worth of that company (which was sold), represents 36 percent of our company. It's about R440 million, and we could get up to R650m for it. If you then take that net asset value, compared to our share price, we've realised some real value there. We weren't in the market to sell it, but we think the price was right and we really didn't have too much choice. They would have come in as competition.
ALEC HOGG: How firm is that net asset value of yours? It's stated now at R2.91, the shares are trading at R1.17. If you can buy something worth nearly R3.00 in the shop for only R1.00, you're going to jump in. People aren't.
BERNIE KRONE: I don't know. Maybe there's just too much negativity around construction for example 'when is the infrastructure spend coming out? Too many people competing for too little work', that's why we changed our emphasis to go more into the development side of things. We spent quite a bit of money last year buying contracts going forward, which we know gives us more visibility into the future.
GUGULETHU MFUPHI: You mentioned negative sentiment, but according to an RMB report, many construction companies who are aligned with future projects – with the Government, are pretty upbeat and are confident about the sector, going forward. With you as well, 52 percent of your work comes from parastatals as well as another 24 percent from Government. Aren't you confident about the plans coming ahead?
BERNIE KRONE: Well we are, but it's very difficult to sit here when you have bad numbers. Our numbers are also split down the middle. Pipelines did very well. They have operating margins close to double digits and they spent the first three years in our stable – underperforming – and we've had some bad luck there with a BG3 contract, which didn't really get off to a good start. Then having the Western Aqueduct taken away from us…we since have a lot of that work back and that division is doing very well. We changed management there, and we set it up some time back though, and we're doing the same with Civils now. It's very easy to blame people that have left the company, but it's also under our watch. We had put in interventions, we have changed people, changed management, and we have new people in the finance department etcetera, so we believe that the interventions are in there now. We'll therefore look at Civils going forward, in a more positive light. Going back to your original question: yes, we haven't seen any of the spend. We're a fairly small company, so we're not meeting the people that are giving out these contracts. We'd probably be involved more in the fringes.
ALEC HOGG: That's interesting because Etienne le Roux from RMB said that, with the Business Confidence Index, that was the one highlight for him – a 70 percent rating in confidence. As Gugu was saying, 'just for the construction industry', so perhaps that's in anticipation.
BERNIE KRONE: Well, it is. We're confident. If our share price drops any more – I've come out of a closed period now, so I'll probably be buying some shares myself. I see value going forward, but the guys say some people say 'we've heard it before', but construction is a tough industry. If you don't have the good contracts to take over, or to make up for the bad contracts, it can hurt you.
GUGULETHU MFUPHI: Just before you go any further, public sector is not so appealing. Are you then looking to increase activity in the private sector?
BERNIE KRONE: That's why we've gone more in charge of our own destiny. We have the opportunity through our development contracts, to be able to do the work ourselves, so effectively, we would be working for ourselves.
ALEC HOGG: Bernie, just to close off with, the special dividend that you're going to be paying after the sale of the Geotechnical division: there was concern that this is a bit light.
BERNIE KRONE: Originally, we went into get support for paying the special dividend at around the R80, or R100 million. Our major shareholders weren't happy with that. They wanted more. Some of them wanted even more than that. About 150 million in total is what we can swallow at this point in time. We're also settling quite a bit in debt. Our whole high yield bond…we are settling.
ALEC HOGG: So of the R500 million, you're paying R150m.
BERNIE KRONE: In special dividends yes.
GUGULETHU MFUPHI: Interesting times in the construction sector, it seems. That was Bernie Krone, Chief Executive of Esorfranki. Remember that you can email us at powerlunch@ABN360.com. After the break, we find out more about Murray & Roberts' issues with the Gautrain arbitration ruling. More Power Lunch right after this.