Shares in Group Five surged by almost 11 percent on Friday after the listed construction and engineering group anticipated significantly higher earnings for the six months to December before tracking back to close 8.6 percent higher on the day at R15.75.

This followed Group Five reporting that fully diluted headline earnings a share for the six months to December were expected to be between 15 percent and 25 percent higher at between R1.24 and R1.35 compared to R1.08 in the corresponding period last year.

Earnings a share for the same period were expected to be between 35 percent and 45 percent higher at between R1.59 and R1.71 compared to R1.18 in the prior period.

Group Five said strong financial results from the investments and concessions cluster had more than offset a continued weak performance by the engineering and construction cluster, which produced operating results below expectation for the interim reporting period.

Retrenchment costs

The company said the investments and concessions cluster had delivered “an excellent result” because of a continued strong performance from the underlying projects.

Group Five said the performance of the engineering and construction cluster was impacted by weaker trading in South Africa combined with additional costs of rationalisation.

“The South African construction and engineering market has experienced further delays in contract awards and low volumes of work flow in an industry already impacted by overcapacity.

“This placed pressure on the replenishment of the group’s contracting order book and on tender margins,” it said.

The group said it incurred further retrenchment costs and holdings costs of core teams in the first half of this financial year to those accrued during its 2015 financial year.

“This follows additional interventions not originally planned, but which have been necessitated due to further market weakness. These costs negatively affected performance, specifically within the civil engineering segment.”

Group Five retrenched 2 500 employees to cut its workforce, including limited-duration contract employees, from 4 400 to about 1 900 in its financial year to June.

Dirk Kotzé, an analyst at Coronation, said he was not surprised by the earnings increase anticipated by Group Five and was expecting earnings growth to be a bit higher than that indicated in the trading update.

Kotzé said quite a strong rebound in Group Five’s earnings was expected because of the weak results in the corresponding period last year, which meant the comparable earnings for this period would be off the low base last year.

He said the earnings were driven by fair value adjustments of the concessions business and development projects from Group Five’s project development business.

Kotzé added the environment was still pretty grim in the underlying construction business of the group.

It will publish its interim financial results on February 15.

–Business Report (Roy Cokayne IOL)